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
Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith
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)
Civil Liabilities
Top Ag Law and Tax Developments of 2022 – Part 1
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Contracts
Top Ag Law and Developments of 2022 – Part 2
Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Environmental Law
Here Come the Feds: EPA Final Rule Defining Waters of the United States – Again
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Estate Planning
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Happenings in Agricultural Law and Tax
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?
Common Law Marriage – It May Be More Involved Than What You Think
The Marital Deduction, QTIP Trusts and Coordinated Estate Planning
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Income Tax
Top Ag Law and Developments of 2022 – Part 3
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Deducting Residual (Excess) Soil Fertility
Deducting Residual (Excess) Soil Fertility – Does the Concept Apply to Pasture/Rangeland? (An Addendum)
Happenings in Agricultural Law and Tax
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?
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Real Property
Equity “Theft” – Can I Lose the Equity in My Farm for Failure to Pay Property Taxes?
Happenings in Agricultural Law and Tax
Adverse Possession and a “Fence of Convenience”
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Abandoned Rail Lines – Issues for Abutting Landowners
Regulatory Law
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Foreign Ownership of Agricultural Land
Abandoned Rail Lines – Issues for Abutting Landowners
Secured Transactions
Priority Among Competing Security Interests
Water Law
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Happenings in Agricultural Law and Tax
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)
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
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
Business Planning
Durango Conference and Recent Developments in the Courts
Is a C Corporation a Good Entity Choice For the Farm or Ranch Business?
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
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
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
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
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
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
More Ag Law Developments – Potpourri of Topics
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
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)
IRS Modifies Portability Election Rule
Modifying an Irrevocable Trust – Decanting
Farm and Ranch Estate Planning in 2022 (and 2023)
Social Security Planning for Farmers and Ranchers
How NOT to Use a Charitable Remainder Trust
Recent Cases Involving Decedents’ Estates
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?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal With Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
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)
Declaring Inflation Reduced and Being Forgiving – Recent Developments in Tax and Law
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
More Ag Law Developments – Potpourri of Topics
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
When Can Depreciation First Be Claimed?
Tax Treatment of Crops and/or Livestock Sold Post-Death
Social Security Planning for Farmers and Ranchers
Are Crop Insurance Proceeds Deferrable for Tax Purposes?
Tax Issues Associated With Easement Payments – Part 1
Tax Issues Associated With Easement Payments – Part 2
How NOT to Use a Charitable Remainder Trust
Does Using Old Tractors Mean You Aren’t a Farmer? And the Wind Energy Production Tax Credit – Is Subject to State Property Tax?
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
Tax Deal Struck? – and Recent Ag-Related Cases
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
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
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
Federal Farm Programs – Organizational Structure Matters – Part Two
Federal Farm Programs: Organizational Structure Matters – Part Three
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Minnesota Farmer Protection Law Upheld
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?
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
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
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)
Friday, January 27, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Overview
Today’s article concludes my look at the top ag law and tax developments of 2022 with what I view as the top two developments. I began this series by looking at those developments that were significant, but not quite big enough to make the “Top Ten.” Then I started through the “Top Ten.”
The top two ag law and tax developments in 2022 – it’s the topic of today’s post.
Recap
Here’s a bullet-point recap of the top developments of 2022 that I have written about:
- Nuisance law (the continued developments in Iowa) - Garrison v. New Fashion Pork LLP, 977 N.W.2d 67 (Iowa Sup. Ct. 2022).
- Minnesota farmer protection law - Pitman Farms v. Kuehl Poultry, LLC, et al., 48 F.4th 866 (8th Cir. 2022).
- Regulation of ag activities on wildlife refuges - Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022).
- Corps of Engineers jurisdiction over “wetland” - Hoosier Environmental Council, et al. v. Natural Prairie Indiana Farmland Holdings, LLC, et al., 564 F. Supp. 3d 683 (N.D. Ind. 2021).
- U. S. Tax Court’s jurisdiction to review collection due process determination - Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022).
- IRS Failure to Comply with the Administrative Procedure Act - Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022); Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022).
- State law allowing unconstitutional searches unconstitutional - Rainwaters, et al. v. Tennessee Wildlife Resources Agency, No. 20-CV-6 (Benton Co. Ten. Dist. Ct. Mar. 22, 2022).
- No. 10 – USDA’s Emergency Relief Program and the definition of “farm income.”
- No. 9 - USDA decision not to review wetland determination upheld - Foster v. United States Department of Agriculture, No. 4:21-CV-04081-RAL, 2022 U.S. Dist. LEXIS 117676 (D. S.D. Jul. 1, 2022).
- No. 8 - Dicamba drift damage litigation - Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022).
- No. 7 – The misnamed “Inflation Reduction Act.”
- No. 6 – Caselaw and legislative developments concerning “ag gag” provisions.
- No. 5 - WOTUS final rule.
- No. 4 – Economic issues
- No. 3 – Endangered Species Act regulations
No. 2 – California Proposition 12
National Pork Producers Council, et al. v. Ross, 6 F.4th 1021 (9th Cir. Jul. 28, 2021), cert. granted, 142 S. Ct. 1413 (2022)
In a huge blow to pork producers (and consumers of pork products) nationwide, the U.S. Court of Appeals for the Ninth Circuit has upheld California’s Proposition 12 in 2021. Proposition 12 requires any pork sold in California to be raised in accordance with California’s housing requirements for hogs. This means that any U.S. hog producer, by January 1, 2022, was required to upgrade existing facilities to satisfy California’s requirements if desiring to market pork products in California. In early 2022, the U.S. Supreme Court announced that it would review the Ninth Circuit’s opinion.
While each state sets its own rules concerning the regulation of agricultural production activities, the legal question presented in this case is whether one state can override other states’ rules. The answer to that question involves an analysis of the Commerce Clause and the “Dormant” Commerce Clause.
The Commerce Clause. Article I Section 8 of the U.S. Constitution provides in part, “the Congress shall have Power...To regulate Commerce with foreign Nations and among the several states, and with the Indian Tribes.” The Commerce Clause, on its face, does not impose any restrictions on states in the absence of congressional action. However, the U.S. Supreme Court has interpreted the Commerce Clause as implicitly preempting state laws that regulate commerce in a manner that disrupts the national economy. This is the judicially-created doctrine known as the “dormant” Commerce Clause.
The “Dormant” Commerce Clause. The dormant Commerce Clause is a constitutional law doctrine that says Congress's power to "regulate Commerce ... among the several States" implicitly restricts state power over the same area. In general, the Commerce Clause places two main restrictions on state power – (1) Congress can preempt state law merely by exercising its Commerce Clause power by means of the Supremacy Clause of Article VI, Clause 2 of the Constitution; and (2) the Commerce Clause itself--absent action by Congress--restricts state power. In other words, the grant of federal power implies a corresponding restriction of state power. This second limitation has come to be known as the "Dormant" Commerce Clause because it restricts state power even though Congress's commerce power lies dormant. Willson v. Black Bird Creek Marsh Co., 27 U.S. 245 (1829). The label of “Dormant Commerce Clause” is really not accurate – the doctrine applies when the Congress is dormant, not the Commerce Clause itself.
Rationale. The rationale behind the Commerce Clause is to protect the national economic market from opportunistic behavior by the states - to identify protectionist actions by state governments that are hostile to other states. Generally, the dormant Commerce Clause doctrine prohibits states from unduly interfering with interstate commerce. State regulations cannot discriminate against interstate commerce. If they do, the regulations are per se invalid. See, e.g., City of Philadelphia v. New Jersey, 437 U.S. 617 (1978). Also, state regulations cannot impose undue burdens on interstate commerce. See, e.g., Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981). Under the “undue burden” test, state laws that regulate evenhandedly to effectuate a local public interest are upheld unless the burden imposed on commerce is clearly excessive in relation to the local benefits.
The Court has never held that discrimination between in-state and out-of-state commerce, without more, violates the dormant Commerce Clause. Instead, the Court has explained that the dormant Commerce Clause is concerned with state laws that both discriminate between in-state and out-of-state actors that compete with one another, and harm the welfare of the national economy. Thus, a discriminatory state law that harms the national economy is permissible if in-state and out-of-state commerce do not compete. See, e.g., General Motors Corp. v. Tracy, 117 S. Ct. 811, 824-26 (1997). Conversely, a state law that discriminates between in-state and out-of-state competitors is permissible if it does not harm the national economy. H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949).
California Proposition 12 Litigation
In 2018, California voters passed Proposition 12. Proposition 12 bans the sale of whole pork meat (no matter where produced) from animals confined in a manner inconsistent with California’s regulatory standards. Proposition 12 established minimum requirements on farmers to provide more space for egg-laying hens, breeding pigs, and calves raised for veal. Specifically, the law requires that covered animals be housed in confinement systems that comply with specific standards for freedom of movement, cage-free design and minimum floor space. The law identifies covered animals to include veal calves, breeding pigs and egg-laying hens. The implementing regulations prohibit a farm owner or operator from knowingly causing any covered animal to be confined in a cruel manner, as specified, and prohibits a business owner or operator from knowingly engaging in the sale within the state of shell eggs, liquid eggs, whole pork meat or whole veal meat, as defined, from animals housed in a “cruel manner.” In addition to general requirements that prohibit animals from being confined in a manner that prevents lying down, standing up, fully extending limbs or turning around freely, the measure added detailed confinement space standards for farms subject to the law. The alleged reason for the law was to protect the health and safety of California consumers and decrease the risk of foodborne illness and the negative fiscal impact on California.
In late 2019, several national farm organizations challenged Proposition 12 and sought a declaratory judgment that the law was unconstitutional under the dormant Commerce Clause. The plaintiffs also sought a permanent injunction preventing Proposition 12 from taking effect. The plaintiffs claimed that Proposition 12 impermissibly regulated out-of-state conduct by compelling non-California producers to change their operations to meet California’s standards. The plaintiffs also alleged that Proposition 12 imposed excessive burdens on interstate commerce without advancing any legitimate local interest by significantly increasing operation costs without any connection to human health or foodborne illness. The trial court dismissed the plaintiffs’ complaint. National Pork Producers Council, et al. v. Ross, No. 3:19-cv-02324-W-AHG (S.D. Cal. Apr. 27, 2020).
On appeal, the plaintiffs focused their argument on the allegation that Proposition 12 has an impermissible extraterritorial effect of regulating prices in other states and, as such, is per se unconstitutional. This was a tactical mistake for the plaintiffs. The appellate court noted that existing Supreme Court precedent on the extraterritorial principle applied only to state laws that are “price control or price affirmation statutes.” National Pork Producers Council, et al. v. Ross, No. 20-55631, 2021 U.S. App. LEXIS 22337 (9th Cir. Jul. 28, 2021). Thus, the extraterritorial principle does not apply to a state law that does not dictate the price of a product and does not tie the price of its in-state products to out-of-state prices. Because Proposition 12 was neither a price control nor a price-affirmation statute (it didn’t dictate the price of pork products or tie the price of pork products sold in California to out-of-state prices) the law didn’t have the extraterritorial effect of regulating prices in other states.
The appellate court likewise rejected the plaintiffs’ claim that Proposition 12 has an impermissible indirect “practical effect” on how pork is produced and sold outside California. Id. Upstream effects (e.g., higher production costs in other states) the appellate court concluded, do not violate the dormant Commerce Clause. The appellate court pointed out that a state law is not impermissibly extraterritorial unless it regulates conduct that is wholly out of state. Id. Because Proposition 12 applied to California and non-California pork production the higher cost of production was not an impermissible effect on interstate commerce.
The appellate court also concluded that inconsistent regulation from state-to-state was permissible because the plaintiffs had failed to show a compelling need for national uniformity in regulation at the state level. Id. In addition, the appellate court noted that the plaintiffs had not alleged that Proposition 12 had a discriminatory effect on interstate commerce.
Simply put, the appellate court rejected the plaintiffs’ challenge to Proposition 12 because a law that increases compliance costs (projected at a 9.2 percent increase in production costs that would e passed on to consumers) is not a substantial burden on interstate commerce in violation of the dormant Commerce Clause.
As noted above, the U.S. Supreme court decided to review the Ninth Circuit’s opinion. Unfortunately, the Supreme Court has been careless in applying the anti-discrimination test, and in many cases, neither of the two requirements--interstate competition or harm to the national economy--is ever mentioned. See, e.g., Hughes v. Oklahoma, 441 U.S. 322 (1979). The reason interstate competition goes unstated is obvious – in most cases the in-state and out-of-state actors compete in the same market. But, the reason that the second requirement, harm to the national economy, goes unstated is because the Court simply assumes the issue away. The Supreme Court’s decision in 2023 is a highly anticipated one for agriculture and the dormant Commerce Clause analysis and application in general.
No. 1 – The “Major Questions” Doctrine
West Virginia, et al. v. Environmental Protection Agency, et al., 142 S. Ct. 2587 (2022)
Clearly, the biggest development of 2022 that has the potential to significantly impact agriculture and the economy in general is the Supreme Court’s opinion involving the Environmental Protection Agency’s (EPA’s) regulatory authority under the Clean Air Act (CAA). The Court invoked the “major question” doctrine to pair back unelected bureaucratic agency authority and return policy-making power to citizens through their elected representatives. The future impact of the Court’s decision is clear. When federal regulations amount to setting nationwide policy and when state regulations do the same at the state level, the regulatory bodies may be successfully challenged in court.
The case involved the U.S. Supreme Court’s review of the EPA’s authority to regulate greenhouse gas emissions from existing power plants under the CAA. The case arose from the EPA’s regulatory development of the Clean Power Plan (CPP) in 2015 which, in turn, stemmed from then-President Obama’s 2008 promise to establish policy that would bankrupt the coal industry. The EPA claimed it had authority to regulate CO2 emissions from coal and natural-gas-fired power plants under Section 111 of the CAA. Under that provision, the EPA determines emission limits. But EPA took the position that Section 111 empowered it to shift energy generation at the plants to “renewable” energy sources such as wind and solar. Under the CPP, existing power plants could meet the emission limits by either reducing electricity production or by shifting to “cleaner” sources of electricity generation. The EPA admitted that no existing coal plant could satisfy the new emission standards without a wholesale movement away from coal, and that the CPP would impose billions in compliance costs, raise retail electricity prices, require the retirement of dozens of coal plants and eliminate tens of thousands of jobs. In other words, the CPP would keep President Obama’s 2008 promise by bypassing the Congress through the utilization of regulatory rules set by unelected, unaccountable bureaucrats.
The U.S. Supreme Court stayed the CPP in 2016 preventing it from taking effect. The EPA under the Trump Administration repealed the CPP on the basis that the Congress had not clearly delegated regulatory authority “of this breadth to regulate a fundamental sector of the economy.” The EPA then replaced the CPP with the Affordable Clean Energy (ACE) rule. Under the ACE rule, the focus was on regulating power plant equipment to require upgrades when necessary to improve operating practices. Numerous states and private parties challenged the EPA’s replacement of the CPP with the ACE. The D.C. Circuit Court vacated the EPA’s repeal of the CPP, finding that the CPP was within the EPA’s purview under Section 7411 of the CAA – the part of the CAA that sets standards of performance for new sources of air pollution. American Lung Association v. Environmental Protection Agency, 985 F.3d 914 (D.C. Cir. 2021). The Circuit Court also vacated the ACE and purported to resurrect the CPP. In the fall of 2021, the U.S. Supreme Court agreed to hear the case.
The Supreme Court reversed, framing the issue as whether the EPA had the regulatory authority under Section 111 of the CAA to restructure the mix of electricity generation in the U.S. to transition from 38 percent coal to 27 percent coal by 2030. The Supreme Court said EPA did not, noting that the case presented one of those “major questions” because under the CPP the EPA would tremendously expand its regulatory authority by enacting a regulatory program that the Congress had declined to enact. While the EPA could establish emission limits, the Supreme Court held that the EPA could not force a shift in the power grid from one type of energy source to another. The Supreme Court noted that the EPA admitted that did not have technical expertise in electricity transmission, distribution or storage. Simply put, the Supreme Court said that devising the “best system of emission reduction” was not within EPA’s regulatory power.
Clearly, the Congress did not delegate administrative agencies the authority to establish energy policy for the entire country. While the Supreme Court has never precisely defined the boundaries and scope of the major question doctrine, when the regulation is more in line with what should be legislative policymaking, it will be struck down. The Supreme Court’s decision is also broad enough to have long-lasting consequences for rulemaking by all federal agencies including the USDA/FSA. The decision could also impact the Treasury Department’s promulgation of tax regulations.
The Supreme Court’s decision returns power to the Congress that it has ceded over the years to administrative agencies and the Executive branch concerning matters of “vast economic and political significance.” But it’s also likely that the Executive branch and the unelected bureaucrats of the administrative state will likely attempt to push the envelope and force the courts to push back. It’s rare that the Executive branch and administrative agencies voluntarily return power to elected representatives as was done in numerous instances from 2017 through 2020.
Conclusion
Agricultural law and tax issues were many and varied in 2022. In 2023, the U.S. Supreme Court will issue opinions in the California Proposition 12 case and the Sackett case involving the scope of the federal government’s jurisdiction over wetlands. Also, there has been a major development in the Tax Court involving tax issues associated with deferred grain contracts that has resulted in a settlement with IRS, the terms of which cannot be disclosed at this time. If 2022 showed a trend with USDA it is that the USDA will continue several “hardline” positions against farmers – a narrow definition of farm income; broad regulatory control over wet areas in fields; and ceding regulatory authority to the EPA and the COE. The U.S. Supreme Court is also anticipated to issue on opinion with potentially significant implications for Medicaid planning.
Of course, the expanding war against Russia being fought in Ukraine will continue to dominate ag markets throughout 2023. At home, the general economic data is not good and that will have implications in 2023 for farmers and ranchers. On January 26, the U.S Bureau of Economic Analysis issued a report (https://www.bea.gov/) showing that the U.S. economy grew by 2.9 percent in the fourth quarter of 2022 and 2.1 percent for all of 2022. But, the report also showed that economic growth in the economy is slowing. Business investment grew by a mere 1.4 percent in the fourth quarter of 2022, consisting almost entirely of inventory growth. That will mean that businesses will be forced to sell off inventories at discounts, which will lower business profits and be a drag on economic growth in 2023. Nonresidential investment was down 26.7 percent due to the increase in home prices, increased interest rates and a drop in real income. On that last point, real disposable income dropped $1 trillion in 2022, the largest drop since 1932 - the low point of the Great Depression. Personal savings also dropped by $1.6 trillion in 2022. This is a "ticking timebomb" that is not sustainable because it means that consumers are depleting cash reserves. This indicates that spending will continue to slow in 2023 and further stymie economic growth - about two-thirds of GDP is based on consumer spending. Relatedly, the Dow was down 8.8 percent for 2022, the worst year since 2008. 2022 also saw a reduction in the pace of international trade. Imports dropped more than exports which increases GDP, giving the illusion that the economy is better off.
Certainly, 2023 will be another very busy year for rural practitioners and those dealing with legal and tax issues for farmers and ranchers.
January 27, 2023 in Civil Liabilities, Environmental Law, Income Tax, Regulatory Law, Water Law | Permalink | Comments (0)
Saturday, January 21, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Overview
Today I continue the journey through what I believe to be the Top 10 developments in agricultural law and agricultural taxation of 2022. Today, I look at developments number eight and seven.
No. 8 – Dicamba Drift Damage Litigation
Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022)
Damage from the drift of Dicamba has been an issue in certain parts of the country for the past two years. Over that time, I have written on the technical aspects of Dicamba and the underlying problems associated with Dicamba application. In 2022, the Dicamba saga continued with litigation involving Missouri’s largest peach farm.
In Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019), the plaintiff is Missouri’s largest peach farming operation and is located in the southeast part of the state. claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) allegedly conspired to develop and market Dicamba-tolerant seeds and Dicamba-based herbicides. The suit alleged that the two companies collaborated on Xtend (herbicide resistant cotton seed) that was intended for use with a less volatile form of Dicamba with less drift potential. But, as of 2015 neither Monsanto nor BASF had produced the new, less volatile, form of Dicamba. That fact led the plaintiff to claim that the defendants released the Dicamba-tolerant seed with no corresponding Dicamba herbicide that could be safely applied. As a result, the plaintiff claimed, farmers illegally sprayed an old formulation of Dicamba that was unapproved for in-crop, over-the-top, use and was highly volatile and prone to drift. The plaintiff claimed its annual peach crop revenue exceeded $2 million before the drift damage, and an expert at trial asserted that the drift caused the plaintiff to lose over $20 million in profits. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. The plaintiff’s suit also involved claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act (MCPA); civil conspiracy; and joint liability for punitive damages.
Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the MCPA; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the MCPA claims. The trial court noted that civil actions under the MCPA are limited to “field crops” which did not include peaches. The trial court, however, did not dismiss the civil conspiracy claim based on concerted action by agreement, but did dismiss the aiding and abetting portion of the claim because that cause of action is not recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant.
Note: The case went to trial in early 2020 and was one of more than 100 similar Dicamba lawsuits. Bayer, which acquired Monsanto in 2018 for $63 billion, announced in June of 2020 that it would settle dicamba lawsuits for up to $400 million.
At trial, the jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and that both defendants had done so for 2017 to the time of trial. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict considering the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020).
BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million (from $250 million) after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
In Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022), the appellate court partially affirmed the trial court, partially reversed, and remanded the case. The appellate court determined that the trial court incorrectly instructed the jury to assess punitive damages for Bayer (i.e., Monsanto) and BASF together, rather than separately, and that a new trial was needed to determine punitive damages for each company. Indeed, the appellate court vacated the punitive damages award and remanded the case to the trial court with instructions to hold a new trial only on the issue of punitive damages.
However, the appellate court did not disturb the trial court’s jury verdict of $15 million in compensatory damages. On the compensatory damages issue, the appellate court held that the trial court properly refused to find intervening cause as a matter of law for the damage to the plaintiff’s peaches. On that point, the appellate court determined that the spraying of Dicamba on a nearby farm did not interrupt the chain of events which meant that the question of proximate cause of the damage was proper for the jury to determine. The appellate court also held that the was an adequate basis for the plaintiff’s lost profits because the award was not based on speculation. The appellate court noted that the peach orchard had been productive for decades, and financial statements along with expert witness testimony calculated approximately $20.9 million in actual damages. The appellate court also determined that the facts supported the jury’s determination that the defendants engaged in a conspiracy via unlawful means – knowingly enabling the widespread use of Dicamba during growing season to increase seed sales.
No. 7 – The Misnamed “Inflation Reduction Act”
If ever there has been a deceptively misnamed piece of legislation, this is it. An Act with $750 billion of newly minted money to will not reduce inflation. Words have no meaning. I suppose that we are supposed to believe that the following provisions of the bill will reduce inflation:
- $3 billion for the U.S. Postal Service to buy new electric mail trucks;
- $3 billion for the EPA to oversee block grants for “environmental justice;”
- $40 billion total to the EPA which includes $30 billion for “disadvantaged communities” (keep in mind that the total annual budget of the EPA is about $10 billion);
- $750 million to the Interior Department for new hires;
- $10 million to the USDA to be spent on “equity commissions” to “combat” racism;
- $25 million to the Government Accountability Office to determine, “whether the economic, social and environmental impacts of the funds described in this paragraph are equitable;”
- Via a budget gimmick to keep the amount outside of the Act’s price tag are amounts to the Energy Department for existing “green” energy loan programs and a new energy loan-guarantee program.
Ag Program Spending
The Act contains a great deal of spending on ag conservation-related programs. Here are the primary provisions:
- EQIP - $8.45 billion additional funding over Fiscal Years 2023-2026. Prioritizes funding for reduction of methane emissions from cattle (e.g., cattle passing gas) and nutrient management activities (e.g., diets to reduce bloating in cows).
- CSP - $3.25 billion additional funding over same time frame.
- Ag Conservation Easement Program (ACEP) - $1.4 billion over same time frame for easements or interests in land that will reduce, capture, avoid or sequester carbon dioxide, or methane oxide emissions with land eligible for the program. ACEP incorporates the Wetlands Reserve Program, the Grasslands Reserve Program and the Farm and Ranch Lands Protection Program.
- Regional Conservation Partnership Program - $4.95 billion over same timeframe for cover cropping, nutrient management, and watershed improvement.
- $4 billion for drought relief that prioritizes the CO basin.
- The U.S. Forest Service gets $1.8 billion for hazardous fuels reduction projects on USFS land.
- $14 billion for rural development and lending projects.
- $3.1 billion to USDA to provide payments to distressed borrowers.
- $2.2 billion to USDA for farmers, ranchers and forest landowners that have been discriminated against in USDA lending programs (i.e., reparations).
- $5 billion to USDA for National Forest System to fund forest reforestation and wildfire prevention.
The IRS gets approximately $80 billion in IRS funding (over next 10 years) to hire 87,000 agents. The IRS currently has 78,000 agents, but 50,000 are set to retire in the next few years. $46 billion is to be dedicated to enforcement and is anticipated to increase the number of audits by $1.2 million annually. $25 billion is earmarked for IRS operations, $5 billion for business systems modernization. IRS taxpayer services, which many tax practitioners would say as the most in need of funding, gets the short end of the stick with $4 billion.
Conclusion
I will continue looking at the biggest developments of 2022 in ag law and tax in the next post.
January 21, 2023 in Civil Liabilities, Income Tax, Regulatory Law | Permalink | Comments (0)
Sunday, January 1, 2023
Top Ag Law and Tax Developments of 2022 – Part 1
Overview
At the beginning of each year for about the past 25 years, I have made a point to catalogue the immediately prior year’s top developments in agricultural law and taxation. It’s important to look back at what the major issues were because they can also provide insight into what might be the big issues in the coming year. Insight into trends in the law and taxation impacting farmers, ranchers, rural landowners and agribusiness is important because it can aid planning to avoid legal issues in the future. The law and taxation can have a significant economic impact on a farming operation, or on a family legacy. While it is very true that issues involving agronomy or animal science or horticulture or other similar disciplines are important and each have their role in the success of a farming business, where “the rubber meets the road” is in the law and taxation. The law and tax rules set the framework within which all other disciplines must operate. A deviation outside those boundaries can result in costly litigation, family disputes and an inefficiently run operation that might not survive into the next generation.
With that in mind, today’s article is the beginning of several that highlight the major legal and tax issues of 2022 that were significant for agriculture. Some are important developments at that state level that could spill over to other states, but the major developments, of course, are those at the federal level – in the federal courts all the way up to the U.S. Supreme Court and with the IRS.
The major developments in ag law and tax from 2022 – the “Almost Top Ten.” It’s the first in a multi-part series.
Nuisance Law
The first development that was significant in 2022, but not important enough nationally to make the Top Ten, involves a nuisance lawsuit in Iowa that resulted in a significant Iowa Supreme Court decision. But, first a bit of background on the issue of ag nuisance
In general. An issue that is of significance to agriculture is that of nuisance. Nuisance law prohibits land uses that unreasonably and substantially interfere with another individual's quiet use and enjoyment of property. It’s based on two interrelated concepts: (1) landowners have the right to use and enjoy property free of unreasonable interferences by others; and (2) landowners must use property so as not to injure adjacent owners. Because each claim of nuisance depends on the fact of the case, there are no easy rules to determine when an activity will be considered a nuisance.
Defenses. There are no common law defenses that an agricultural operation may use to shield itself from liability arising from a nuisance action. However, courts do consider a variety of factors. Of primary importance are priority of location and reasonableness of the operation. Together, these two factors have led courts to develop a “coming to the nuisance” defense. This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.
While there are no common law defenses to a nuisance suit, every state has enacted a right-to-farm law that is designed to protect existing agricultural operations by giving farmers and ranchers who meet the legal requirements a defense in nuisance suits. The basic thrust of a particular state's right-to-farm law is that it is unfair for a person to move to an agricultural area knowing the conditions which might be present and then ask a court to declare a neighboring farm a nuisance. Thus, the basic purpose of a right-to-farm law is to create a legal and economic climate in which farm operations can be continued.
The continued Iowa saga of ag nuisance and “right-to-farm” legislation. Iowa has had a lengthy history of litigation involving animal confinement operations and nuisance suits. In 2004, the Iowa Supreme Court, in Gacke v. Pork XTRA, L.L.C., 684 N.W.2d 168 (Iowa 2004) addressed the constitutionality of the Iowa right-to-farm law. Under the facts of the case, the defendant built a confinement hog facility 1,300 feet to the north of the plaintiffs’ farmstead which the plaintiffs had occupied since 1974. In the summer of 2000, the plaintiffs filed a nuisance action against the defendant claiming damages for personal injury, emotional distress and a decrease in the value of their property, and seeking a permanent injunction, compensatory and punitive damages. The defendant raised the Iowa right-to-farm statute as a defense. The pertinent part of the statute provides:
“An animal feeding operation…shall not be found to be a…nuisance under this chapter or under principles of common law, and the animal feeding operation shall not be found to interfere with another person’s comfortable use and enjoyment of the person’s life or property under any other cause of action.” Iowa Code §657.11.
Importantly, the statutory protection applies regardless of whether the animal feeding operation was established (or expanded) before or after the complaining party was present in the area. However, the protection of the statute does not apply if the animal feeding operation is not in compliance with all applicable federal and state laws for operation of the facility, or the facility unreasonably and for substantial periods of time interferes with the plaintiff’s comfortable use and enjoyment of the plaintiff’s life or property and failed to use generally accepted best management practices.
The plaintiffs claimed that the statute was an unconstitutional taking of their private property without just compensation in violation of both the Federal and Iowa constitutions. The trial court held that the statute did amount to an unconstitutional taking of the plaintiffs’ property, determined that the value of their property had been reduced by $50,000, and that the plaintiffs should be awarded $46,500 to compensate them for their past inconvenience, emotional distress and pain and suffering. However, the court refused to award any future special or punitive damages or injunctive relief.
On appeal, the Iowa Supreme Court held the right-to-farm law unconstitutional, but only to the extent that it denied the plaintiffs compensation for the decreased value of their property. In essence, the Court held that the statute gave the defendant an easement to produce odors over the plaintiffs’ property, for which compensation had to be paid. Importantly, the Court did not opine that right-to-farm laws are not a legitimate purpose of state government. To the contrary, the Court noted the Iowa legislature’s objective of promoting animal agriculture in the state and that the right-to-farm law bore a reasonable relationship to that legitimate objective. The Court also seemed to indicate that the statute would not be constitutionally defective had the plaintiffs “come to the nuisance” (i.e., moved next door to the defendant’s existing hog operation).
Note: Post Gacke, the Iowa right-to-farm law could be found to be unconstitutional on a case-by-case basis as determined by a three-part test with the burden on the plaintiff of establishing each element: 1) that the plaintiff personally had not benefitted from the right-to-farm law beyond what the general public enjoyed; 2) that the plaintiff suffered significant hardship; and 3) that the plaintiff lived on their property before the defendant’s operation began and that both the plaintiff and the defendant spent considerable funds in property improvements.
2022 development. In 2022, the Iowa Supreme Court again issued an opinion involving a nuisance suit against a confined animal feeding operation (CAFO). In Garrison v. New Fashion Pork LLP, 977 N.W.2d 67 (Iowa Sup. Ct. 2022), the plaintiff claimed that the defendant’s neighboring confined animal feeding operation (CAFO) violated both the Clean Water Act and the Resource Conservation Recovery Act due to manure runoff that caused excessive nitrate levels in the plaintiff’s water sources. The federal court dismissed the suit on summary judgment for lack of expert testimony to establish the plaintiff’s claim, finding that the alleged violations where wholly past violations, and that water test results showed no ongoing violation of either statute, but rather a slight decrease in nitrate levels since the start of the defendant’s confined animal feeding operation (CAFO). The federal court also declined supplemental jurisdiction over the plaintiff’s state law claims. The plaintiff then sued the defendant in state court for nuisance, trespass and violation of state drainage law. The defendant moved for summary judgment based on statutory immunity of Iowa Code § 657.11 and the plaintiff’s lack of evidence or expert testimony.
The plaintiff, relying on Gacke, claimed that Iowa Code §657.11 as applied to him was unconstitutional under Iowa’s inalienable rights clause. The trial court, noting that the plaintiff’s own CAFO (raising of 500 ewes, and at times over 1,000 ewes and lambs, on his property for over 40 years, along with a six-foot tall manure pile) had benefited from immunity, rejected the plaintiff’s constitutional challenge for failure to satisfy Gacke’s three-part test. The trial court then granted the defendant’s summary judgment motion based on the plaintiff’s failure to provide any expert testimony or other evidence to support any exception to the statutory immunity defense or to prove causation or damages.
On further review, the Iowa Supreme Court affirmed, overruled the three-part test of Gacke and applied rational basis review to reject the plaintiff’s constitutional challenge to Iowa Code §657.11. The court noted that the statue did not eliminate nuisance claims against CAFOs, but rather established reasonable limitations on recovery rights. The Iowa Supreme Court concluded that the plaintiff failed to preserve error on his takings claim under article I, section 18 of the Iowa Constitution and failed to generate a question of fact precluding summary judgment on statutory nuisance immunity or causation for his trespass and drainage claims. Specifically, the Iowa Supreme Court noted that without accompanying expert testimony, the plaintiff’s water tests showed neither an increase in nitrate levels nor a spike in nitrate levels that would correlate with manure spreading. The Supreme Court further noted that even assuming an increase in nitrate levels, the plaintiff lacked expert testimony to attribute or correlate any increase in nitrate levels in the stream to the defendants’ actions. Thus, without expert witness testimony that tied the defendant’s alleged misapplication or over-application of manure to the nitrate levels in the plaintiff’s stream, the plaintiff could not, as a matter of law, satisfy his burden of proving that any trespass or drainage violation proximately caused his damages. Ultimately, the Supreme Court concluded, “balancing the competing interests of CAFO operators and their neighbors is a quintessentially legislative function involving policy choices…[belonging] with the elected branches.”
Note: The Iowa Supreme Court’s opinion didn’t explain how the attorneys for the plaintiff failed to preserve error on the plaintiff’s takings claim and failed to provide expert witness testimony on the tort claims for trespass and drainage issues. However, the Iowa Supreme Court clearly focused on those deficiencies in its opinion.
Going forward, if a jury finds that a nuisance exists the ag operation can use the nuisance defense if the operation is in full compliance with state and federal regulations, exercises generally accepted management practices, and has for substantial periods of time not interfered with the use and enjoyment of the complaining party’s property. The nuisance defense will apply regardless of the established date or expansion of the operation. In other words, there is no “first-in-time” requirement.
Conclusion
There have been several significant developments over the past couple of years either legislatively or in the courts involving ag nuisances in several states. Expect that to continue and also expect that the 2022 development in Iowa to have an impact on other state legislatures and courts grappling with the ag nuisance issue.
January 1, 2023 in Civil Liabilities | Permalink | Comments (0)
Monday, December 5, 2022
Ag Law Developments in the Courts
Overview
It’s been a while since I did a blog article on recent court developments involving farmers, ranchers rural landowners and agribusinesses. I have been on the road just about continuously for the last couple of months and nine more events remain between now and Christmas. But, let me take a moment today (and later this week) to provide a summary of some recent court cases involving agriculture.
Recent court opinions involving agriculture – it’s the topic of today’s post.
Jumping Mouse Habitat Designation Upheld
Northern New Mexico Stockman’s Association, et al. v. United States Fish and Wildlife Service, 494 F.Supp.3d 850 (D. N.M. 2020), aff’d., 30 F.4th 1210 (10th Cir. 2022)
In 2014, the U.S. Fish and Wildlife Service (USFWS) listed the New Mexico Meadow Jumping Mouse as an endangered species based on substantial habitat loss and fragmentation from grazing, water management, drought and wildfire. Accordingly, in 2016, the USFWS designated 14,000 acres along 170 miles of streams and waterways in New Mexico, Arizona and Colorado as critical habitat for the mouse. The U.S. Forest Service erected fencing around some streams and watering holes in the Santa Fe and Lincoln National Forests that were in the designated area The plaintiffs, two livestock organizations, with members that graze cattle in those national forests, sued in 2018 claiming that the USFWS failed to sufficiently consider the economic impact of the critical habitat designation. The trial court dismissed the case, finding that the USFWS was justified in its decision. The trial court also determined that the USFWS need not compensate the plaintiffs for the reduction in value of the plaintiffs’ water rights. The trial court reasoned that the USFWS need not consider all of the economic impacts associated with the mouse’s listing when designating critical habitat, only the incremental costs of the designation itself. The court cited the nine-month annual hibernation period of the mouse giving it only a short time to breed and gain weight for the winter and, as such, the mouse’s habitat needed to remain ideal with tall, dense grass and forage around flowing streams in the designated area. On appeal, the appellate court affirmed. The appellate court held that the assessment method of the USFWS for determining the economic impacts of the critical habitat designation on the water rights of the plaintiffs’ members was adequately considered, and that the USFWS had reasonably supported its decision not to exclude certain areas from the critical habitat designation.
Court Reduces Dicamba Drift Damage Award; Case Continues on Punitive Damages Issue
Hahn v. Monsanto Co., 39 F.4th 954 (8th Cir. 2022)
The plaintiff claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) conspired to develop and market dicamba-tolerant seeds and dicamba-based herbicides. The plaintiff claimed that the damage to the peaches occurred when dicamba drifted from application to neighboring fields. The plaintiff claimed that the defendants released the dicamba-tolerant seed with no corresponding dicamba herbicide that could be safely applied. As a result, farmers illegally sprayed an old formulation of dicamba herbicide that was unapproved for in-crop, over-the-top, use and was "volatile," or prone to drift. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the claims based on the Missouri Crop Protection Act, noting that civil actions under this act are limited to “field crops” which did not include peaches. The trial court did not dismiss the civil conspiracy claim based on concerted action by agreement but did dismiss the aiding and abetting portion of the claim because that cause of action is no recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant. Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019). The jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and the both defendants had done so for 2017 to the present. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict in light of the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020). BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
On appeal, the appellate court affirmed the trial court on the causation issue noting that the defendant retained direct contact with the farmers and exercised some degree of control over their actions. As such, the defendant was aware of the foreseeable consequences that could come from not controlling the farmers’ actions more closely. On the compensatory damage issue, the defendant argued that compensatory damages should be measured by the difference in the value of the orchard before and after the damage. The appellate court disagreed, noting that such a calculation only applied when the victim is the owner of the land and not a tenant as was the plaintiff. Thus, compensatory damages were properly measured by lost profits. The defendant argued the damages were speculative, but the court found that Bader Farms had provided years of financial statements to show the usual costs and profits associated with farming the orchard. The appellate court determined that there was no doubt the defendant had full control over the critical aspects of the project. In 2007, BASF had relinquished their rights to the seed technology to the defendant, so they could not control something they had no rights to. The appellate court also affirmed the finding that BASF and Monsanto had engaged in a civil conspiracy by agreeing to sell products unlawfully and enabling the widespread use of a product that was illegal to spray during the growing season. As members of the civil conspiracy, BASF was correctly found to be severally liable for the damages. The appellate court also found that Bader Farms provided clear and convincing evidence that the companies had acted with reckless indifference, but the two had different degrees of culpability. The trial court should have assessed the punitive damages of the Monsanto and BASF separately. Thus, the appellate court affirmed in part and reversed and remanded the punitive damages judgment to the trial court.
Court Decides to Resolve Property Dispute by Requiring Parties to Use the Existing Property Line
Barlow v. Saxon Holdings Trust, No. SD37361, 2022 Mo. App. LEXIS 657 (Mo. Ct. App. Oct. 21, 2022)
The plaintiff and her husband purchased land in 1987 by warranty deed that included the language, “running thence Southwesterly along the fence 40 rods.” At the time the plaintiff purchased the property, a fence that ran north to south existed and the plaintiff believed and acted like she owned the land up to that fence. The defendant purchased the neighboring land in 2011 and executed a warranty deed that included the language, “beginning at the NE corner of the NE ¼ of said Section 23 and running SW 40 rods.” In the spring of 2020, the defendant hired a surveyor who informed the defendant that his property extended onto the plaintiff’s property to the “40-rod line.” The defendant put up an electric fence on the disputed property to claim it. In response the plaintiff hired a surveyor who determined the property line was on the original fence line. The plaintiff sued to quiet title. The trial court found ambiguity between the deeds and resolved the ambiguity in favor of the plaintiff and held the plaintiff had adversely possessed the land. The defendant appealed. The appellate court recognized that the deeds individually did not show patent ambiguity, but the difference between the two on the location of property line did create an ambiguity. The appellate court determined that one way to resolve the ambiguity would be to have the parties continue to occupy the land the way they had in accordance with one of the deeds or constructions. This was the trial court’s approach, and the appellate court affirmed the trial court on this point. The appellate court also noted that the trial court had found the plaintiff’s surveyor credible, and that credibility of a witness was a determination to be left to the trial court’s discretion that the appellate court would not disturb. The appellate court affirmed the trial court’s resolution of the deed in favor of the plaintiff and determined it need not address the adverse possession claim.
Oil and Gas Lease on Disputed Property Invalidates Adverse Possession
Cottrill v. Quarry Enterprises, LLC, No. 2022 CA 00011, 2022 Ohio App. LEXIS 3191 (Ohio Ct. App. Sept. 27, 2022)
The plaintiff claimed that she had successfully adversely possessed the defendant’s property by receiving title to the property in 1971 from her mother and caring for the land by mowing and maintaining it and using it for recreational events for herself and family. The trial court granted summary judgment for the defendant, finding that the plaintiff failed to establish exclusive possession over the land due to an existing oil and gas lease that the defendant had executed. The plaintiff appealed, claiming that the lease did not invalidate her exclusive use. To show exclusive use, the plaintiff did not have to be the only person who used the land but needed to be the only person who asserted their right to possession over the land. The appellate court found that the oil and gas that existed on the property began in 1958. For the entirety of the time that the plaintiff claimed she had adversely possessed the property, the oil and gas company had the right of possession over the land in dispute, invalidating the plaintiff’s claim.
December 5, 2022 in Civil Liabilities, Environmental Law, Real Property, Regulatory Law | Permalink | Comments (0)
Thursday, October 6, 2022
More Ag Law Developments – Potpourri of Topics
Overview
The courts have continued to issue decisions of relevance to farmers, ranchers and rural landowners. In today’s post, I take a look at some of them from around the country. From property rights to income tax to bankruptcy to herbicide crop damage and landowners disputing over drainage – it’s covered below.
Court Says Public Has Right to Use Private Riverbeds
Adobe Whitewater Club of N.M. v. N.M. State Game Comm'n., No. S-1-SC-38195, 2022 N.M. LEXIS 34 (N.M. Sup. Ct. Sept. 1, 2022)
The plaintiffs, various environmental and recreation groups, sued the New Mexico State Gaming Commission (Commission), claiming a regulation of the Commission violated the public’s right to use parts of New Mexico’s rivers. In 2017, the Commission, promulgated a regulation that outlined a process for landowners to obtain a certificate allowing them to close public access to segments of public water flowing over private property. The plaintiffs challenged the regulation as unconstitutional. Article XVI, Section 2 of the New Mexico state constitution states, “the unappropriated water of every natural stream, perennial or torrential, within the state of New Mexico, is hereby declared to belong to the public.” The issue was whether the public’s right to use the public waters included the right to use the privately owned waterbeds. The New Mexico Supreme Court determined that riverbeds were considered navigable waterways and were subject to the “public trust doctrine.” The private landowners along the riverbed intervened in the lawsuit and claimed the public would be considered trespassers on their land and they could exclude the trespassers. The Court disagreed, finding that the public has the right to use private land when reasonably necessary to gain access to or enjoy public rivers. The Court stated, “A determination of navigability only goes to who has title to the bed below the public water, not to the scope of the public use.” As such the court concluded that the public had access to such rivers to float, wade, fish and engage in other recreational activities that would have a minimal impact on the rights of private property owners. In addition, the Court held that such waters are and always have been public. Accordingly, the Court invalidated the Commission’s regulation.
Retained Ownership of Minable Surface Negates Conservation Easement Deduction.
C.C.A. 202236010 (Sept. 9, 2022)
The Chief Counsel’s office of IRS has taken the position that a conservation easement donation is invalid if the donor owns both the surface estate of the land burdened by the easement as well as a qualified mineral interest that has never been separated from the surface estate, and the deed retains any possibility of surface mining to extract subsurface minerals. In that instance, the conservation easement doesn’t satisfy I.R.C. §170(h). The IRS said the result would be the same even if the donee would have to approve the surface-mining method because the donated easement would not be donated exclusively for conservation purposes in accordance with I.R.C. §170(h)(5). The IRS pointed out that Treas. Reg. §1.170A-14(g)(4) states that a donated easement does not protect conservation purposes in perpetuity if any method of mining that is inconsistent with the particular conservation purposes of the contribution is permitted at any time. But, the IRS pointed out that a deduction is allowed if the mining method at issue has a limited, localized impact on the real estate and does not destroy significant conservation interests in a manner that can’t be remedied. Surface mining, however, is specifically prohibited where the ownership of the surface estate and the mineral interest has never been separated. On the specific facts involved, the IRS determined that the donated easement would not be treated at being made exclusively for conservation purposes because the donee could approve surface mining of the donor’s subsurface minerals.
Family Farms Not Part of Bankruptcy Estate.
Ries v. Archer (In re Archer), Nos. 17-20045-RLJ-7, 19-02001, 2022 Bankr. LEXIS 2250 (Bankr. N.D. Tex. Aug. 12, 2022)
A chapter 7 trustee sought a declaration that certain farm ground was a part of the bankrupt estate. The debtors, a married couple, had eight children, who all but one became medical doctors. The debtors had funded their children’s education throughout their lives with funds derived from the family farm. They owned 14 sections of land in Moore County, Texas, (northwest Texas) comprising what was referred to as the “Moore County Farm.” Although, the deed from 1988 for the land listed the defendant’s children’s IRA as the grantee-buyer of the land, the children did not have IRAs at the time or played any part in purchasing the land. The children were not given any right to manage or operate the Moore County Farm so long as the debtors were mentally competent. Beginning in 1998, the USDA and CRP program began making payments to some of the defendant’s children and in 2007 farmers who rented land from the Moore County Farm began to pay some of the children. The children began to open accounts and lines of credit associated with the expenses of the Moore County Farm. From 2005 to 2017, the debtors instructed some of their children to apply as “New Producers” to the Federal Crop Insurance Program. Through this program they were provided with favorable crop insurance as “managers” of a farm, but none of the children had managerial control. Ultimately, the children were charged with and convicted of insurance fraud. Along with the 1988 deed, the debtors executed a warranty deed for the Moore County Farm to some of the children in 2006 and later transferred the farm to the children’s IRAs. In 2008, one of the defendant’s children purchased 670 acres in Randall County, referred to as the “Randall County Farm”. The debtors ultimately had primary authority and control of the farming operations of the Randall County Farm along with the Moore County Farm and had full control over the finances and accounting of the farms. The children did pay for some of the expenses on the Randall County Farm, but overall, the debtors operated the two farms as one entity. There were no further legal issues until 2011 when one of the debtors’ cows was hit by a motorist who sustained serious injuries because of the accident and filed suit. The court awarded the man $8.95 million in damages to be paid by the debtors. The debtors then filed Chapter 7 bankruptcy. The bankruptcy court noted that the children had shared significant responsibilities over the Moore County Farm with their father and that their father wanted to pass the property to his children through the deeds. The court concluded that just because the debtors continued to run the farm did not mean they did not want to ultimately gift the land to the children. The bankruptcy trustee argued this was another scam set up by the family, but the court was not convinced given the common desire of parents to devise property to their children. The evidence showed that the debtors’ intent was for the children to own the farms and operate them for enjoyment. Based on these considerations, the court concluded that the Moore County Farm was not part of the bankruptcy estate. The trustee claimed that the Randall County Farm should have been a part of the estate. Because one of the children who purchased the land negotiated a conservation plan with the USDA, received CRP payments, and paid for the farm expenses, the child was the true owner of the Randall County Farm and could not be considered part of the bankruptcy estate.
FIFRA Doesn’t Preempt State-Based Warranty Claims
Kissan Berry Farm v. Whatcom Farmers Cooperative, et al., No. 82774-0-I, 2022 Wash. App. LEXIS 1766 (Wash. Ct. App. Sept. 6, 2022)
The plaintiffs, five state of Washington red raspberry farms, claimed that the use of herbicide Callisto in 2012 killed their berry plants causing more than $2.5 million in lost production for 2012 and two following crop years. Callisto’s use was recommended by an agronomist working on behalf of. the defendant. Callisto’s maker, Syngenta was also named in the suit. Callisto’s label stated that it was safe for use on red raspberries. The label also indicated that usage could result in some crop damage and that compensation for crop damage was limited to the price of the herbicide. The plaintiffs asserted that Syngenta and the agronomist had made various warranties that Callisto was safe for use on red raspberries. Syngenta’s position that the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) preempted the farmers’ claims. The trial court agreed on the basis that the plaintiffs’ claims would have required Syngenta to change the product label due to state law. The appellate court reversed based on Bates v. Dow Agrosciences LLC, 544 U.S. 431 (2005). Under Bates, state law cannot require a change to a federally approved label, but state-based claims for breach of warranty are not preempted. the Supreme Court found that a pesticide manufacturer who is found liable for state law breach of express warranty claims is not then induced to change their federally registered pesticide label.
Comparative Fault for Unmaintained Waterway
Watters v. Medinger, No. 21-1076, 2022 Iowa App. LEXIS 667 (Iowa Ct. App. Aug. 31, 2022)
The parties had been in various legal spats involving farmland for over a decade. The plaintiff owned farmland adjacent to the defendant that contained waterways. The plaintiff sued the defendant claiming the defendant altered his land in various ways causing extreme degradation and erosion along the plaintiff’s waterways. The trial court determined that the plaintiff was contributorily negligent for failing to maintain or mow around the waterways, which allowed for ragweed to grow. The ragweed destroyed the grass along the waterway, which meant the water would flood quicker than it would have if grass could absorb some of the moisture. The trial court found that the defendant’s construction of a new cattle shed and addition of drain tiles did cause damage to the plaintiff’s property, but the at that time the plaintiff had already stopped properly maintaining the waterway. The trial court awarded the plaintiff $2,000 in damages to repair the damage caused by the erosion. The plaintiff appealed claiming that the damage award was insufficient. The appellate court reviewed the plaintiff’s argument that the jury instruction was improper regarding comparative fault. The plaintiff tried to argue that he could not repair any part of the erosion until the drainage issues were solved. The appellate court held the plaintiff failed to address the failure to maintain the waterway before the draining issues arose. A farm tenant testified that the plaintiff’s property was already in “tough shape” before the defendant made any changes to his property. The appellate court held the comparative fault instruction was proper, because there was “a causal connection between the plaintiff’s fault and the claimed damages.” Further, the appellate court held the award of damages was sufficient because the jury settled on an amount within the range of evidence based on expert testimony. Just because the amount was at the low end of the range did not mean the amount was insufficient. The appellate court affirmed the trial court’s decision to deny the plaintiff’s motion for a new trial.
Conclusion
Agricultural law and taxation is a very dynamic discipline. There is never a dull moment -more fodder for my radio shows and TV interviews, and content for my books and seminars.
October 6, 2022 in Bankruptcy, Civil Liabilities, Environmental Law, Income Tax, Real Property, Water Law | Permalink | Comments (0)
Wednesday, September 14, 2022
Ag Law and Tax Developments
Overview
It’s been a while since I last did an case and ruling update. So, today’s post is one of several that I will post in the coming weeks.
Some recent developments in the courts and IRS – it’s the topic of today’s post.
Retained Ownership of Minable Surface Negates Conservation Easement Deduction
C.C.A. 202236010 (Sept. 9, 2022)
The Chief Counsel’s office of IRS has taken the position that a conservation easement donation is invalid if the donor owns both the surface estate of the land burdened by the easement as well as a qualified mineral interest that has never been separated from the surface estate, and the deed retains any possibility of surface mining to extract subsurface minerals. In that instance, the conservation easement doesn’t satisfy I.R.C. §170(h). The IRS said the result would be the same even if the donee would have to approve the surface-mining method because the donated easement would not be donated exclusively for conservation purposes in accordance with I.R.C. §170(h)(5). The IRS pointed out that Treas. Reg. §1.170A-14(g)(4) states that a donated easement does not protect conservation purposes in perpetuity if any method of mining that is inconsistent with the particular conservation purposes of the contribution is permitted at any time. But, the IRS pointed out that a deduction is allowed if the mining method at issue has a limited, localized impact on the real estate and does not destroy significant conservation interests in a manner that can’t be remedied. Surface mining, however, is specifically prohibited where the ownership of the surface estate and the mineral interest has never been separated. On the specific facts involved, the IRS determined that the donated easement would not be treated at being made exclusively for conservation purposes because the donee could approve surface mining of the donor’s subsurface minerals.
Use of Pore Space Without Permission Unconstitutional
Northwest Landowners Association v. State, 2022 ND 150 (2022)
North Dakota law provides that a landowner’s subsurface pore space can be used for oil and gas waste without requiring the landowner’s permission or the payment of any compensation. The plaintiffs challenged the law as an unconstitutional taking under the Fourth and Fifth Amendments. The trial court held that the law was unconstitutional on its face and awarded attorney’s fees to the plaintiff. On further review, the North Dakota Supreme Court determined that the plaintiffs had a property interest in subsurface pore space and that the section of the law specifying that the landowners did not have to provide consent to the trespassers to use the land unconstitutionally deprived them of their property rights as a per se taking. However, the Supreme Court determined that the section of the law allowing oil and gas producers to inject carbon dioxide into subsurface pore space was constitutional. The Supreme Court upheld the award of attorney fees.
Net Operating Loss Couldn’t Be Carried Forward
Villanueva v. Comr., T.C. Memo. 2022-27
The petitioner sustained a loss from the disposition of a condominium he owned as a rental property. He reported the date of the loss as August 2013, but a mortgage lender had foreclosed on the condo in May 2009 and the taxpayer lost possession on that date. The IRS denied the deduction on the basis that the petitioner had not claimed the loss on either an original or amended return which meant that there was no loss that could be carried forward. The Tax Court agreed with the IRS, noting that the Treasury Regulations for I.R.C. §165 provide that a loss is treated as sustained during the tax year in which the loss occurs as evidenced by a closed and completed transaction and fixed by identifiable events occurring in such taxable year. A loss resulting from a foreclosure sale is typically sustained in the year in which the property is disposed of, and the debt is discharged from the proceeds of the foreclosure sale. Thus, the Tax Court determined that the loss had occurred in 2009 and should have been claimed at that time where it could have then been carried forward.
Overtime Pay Rate Not Applicable to Construction Work on Farm
Vanegas v. Signet Builders, Inc., No. 21-2644, 2022 U.S. App. LEXIS 23206 (7th Cir. Aug. 19, 2022)
The plaintiff, the defendant’s employee, worked overtime in building a livestock fence for the defendant. The defendant refused to pay the plaintiff time and a half for overtime. The plaintiff sued the defendant to recover the extra wages. The defendant’s refusal was based on the plaintiff being an agricultural worker not entitled to overtime. The trial court agreed and dismissed the plaintiff’s claim. The plaintiff appealed. The appellate court looked to the language of 29 U.S.C. § 213(b)(12) and the work of the plaintiff to determine if the plaintiff would be considered an agricultural employee. The appellate court found the plaintiff’s work was carried out as a separately organized activity outside of the defendant’s agricultural operations. The plaintiff worked for the defendant, but he built the fence on his own without any aid from any of the farm employees. The appellate court noted that another indication the work would not be considered exempt is whether farmers typically hire someone out for the work at issue. If so, it could be an indication the work is separate from agricultural work and would qualify for overtime pay. The appellate court found the defendant failed to provide much evidence to show that the plaintiff worked with agricultural employees and did not show the work was commonly done by a farmer. The appellate court also reasoned that just because the plaintiff was given a visa for agricultural work did not mean his work for the defendant was agricultural. The appellate court reversed the trial court’s decision to dismiss the complaint.
Early Distribution “Penalty” is a “Tax” and Does Not Require Supervisor Approval
Grajales v. Comr., No. 21-1420, 2022 U.S. App. LEXIS 23695 (4th Cir. Aug. 24, 2022), aff’g., 156 T.C. 55 (2021)
The petitioner borrowed money from her pension account at age 42. She received an IRS Form 1099-R reporting the gross distributions from the pension of $9,025.86 for 2015. She didn’t report any of the amount as income in 2015. The IRS issued her a notice of deficiency for $3,030.00 and an additional 10 percent penalty tax of $902.00. The parties later stipulated to a taxable distribution of $908.62 and a penalty of $90.86. The petitioner claimed that she was not liable for the additional penalty tax because the IRS failed to obtain written supervisory approval for levying it under I.R.C. §6751(b). The Tax Court determined that the additional 10 percent tax of I.R.C. §72(t) was a “tax” and not an IRS penalty that required supervisor approval before it would be levied. The Tax Court noted that I.R.C. §72(t) specifically refers to it as a “tax” rather than a penalty and that other Code sections also refer to it as a tax. The appellate court affirmed.
U.S. Fish & Wildlife Service Can Regulate Ag Practices on Leased Land
Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022)
The plaintiffs sued the defendant, U.S. Fish and Wildlife Service, claiming the defendant violated environmental laws by regulating leased farmland in the Tule Lake and Klamath Refuge. The trial court granted summary judgment in favor of the defendant. The plaintiff appealed. The appellate court noted that the Kuchel Act and the Refuge Act allow the defendant to determine the proper land management practices to protect the waterfowl management of the area. Under the Refuge Act, the defendant was required to issue an Environmental Impact Statement (EIS) and Comprehensive Conservation Plan (CCP). The defendant did issue an EIS and CCP for the Tule Lake and Klamath Refuge area, which included modifications to the agricultural use on the leased land within the region. The EIS/CCP required the leased lands to be flooded post-harvest, restricted some harvesting methods, and prohibited post-harvest field work, which the plaintiffs claimed violated their right to use the leased land. The plaintiffs argued that the language, “consistent with proper waterfowl management,” within the Kuchel Act was “nonrestrictive” and was not essential to the meaning of the Act. The appellate court held it was improper to read just that portion of the Act without considering the rest of the Act to understand the intent. The appellate court found the Kuchel Act was unambiguous and required the defendant to regulate the leased land to ensure proper waterfowl management. The Refuge Act allows the defendant to regulate the uses of the leased land, but the plaintiffs argued the agricultural practices were a “purpose” rather than a “use” so the defendant could not regulate it under the Refuge Act. The appellate court found the agriculture on the leased land was not a “purpose” equal to waterfowl management. The appellate court also held the language of the act was unambiguous and determined that agricultural activities on the land was to be considered a use that the defendant could regulate. The appellate court affirmed the trial court’s award of summary judgment for the defendant.
Crop Salesman Sued for Ruining Relationship with Landowner
Walt Goodman Farms, Inc. v. Hogan Farms, LLC, No. 1:22-cv-01004-JDB-jay, 2022 U.S. Dist. LEXIS 134192 (W.D. Tenn. Jul. 28, 2022)
The plaintiff, a farm tenant, sued the defendant landlord and a third-party ag salesman. The plaintiff claimed that the salesman wrongly advised the landlord and encouraged the landlord to complain about the plaintiff’s farming practices. Specifically, the plaintiff’s claims against the salesman were for interference with contract, interference with business relationship, and fraud. The salesman moved to dismiss each claim, but the trial court denied the motion with respect to the contract interference and interference with business relationship claims. The trial court, however, dismissed the fraud claim involving the efficacy of corn seed.
Standard Default Interest Rate Not Unconscionable
Savibank v. Lancaster, No. 82880-1-I, 2022 Wash. App. LEXIS 1558 (Wash. Ct. App. Aug. 1, 2022)
The defendant obtained a loan from the plaintiff to purchase his father’s farm before the virus outbreak. The loan agreement stated that the interest rate would increase to 18 percent upon default. The defendant did default when the pandemic hit, and the plaintiff filed a foreclosure and repossession action against the plaintiff. The trial court ruled in favor the plaintiff. The defendant appealed and asserted the 18 percent default interest rate was unconscionable during a pandemic. During the appeal, the defendant claimed the plaintiff should have alerted the defendant to any better loan alternatives but failed to do so. The appellate court, affirmed, finding that the plaintiff had no contractual obligation to make the defendant aware of any better financing agreement. The appellate court also upheld the trial court’s finding that the 18 percent default interest rate was not unconscionable and was common for agricultural loans with other banks in the area. The appellate court also noted that the defendant had the opportunity to consult with a lawyer about the loan terms before signing. The loan terms were standard and straightforward, and the defendant failed to show any evidence as to how the virus caused his default or how it made the default interest rate unconscionable. In addition, the court noted that the defendant had stopped making loan payments before the virus began to impact the United States. The appellate court also held that the defendant failed to provide any evidence for an unconscionability defense.
Conclusion
I’ll post additional developments in a subsequent post.
September 14, 2022 in Civil Liabilities, Income Tax, Real Property, Regulatory 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
Other Important Developments in Agricultural Law and Taxation
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
Business Planning
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
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
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
IRS Audit Issue – S Corporation Reasonable Compensation
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
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
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
Durango Conference and Recent Developments in the Courts
Civil Liabilities
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Agritourism
https://lawprofessors.typepad.com/agriculturallaw/2022/03/agritourism.html
Animal Ag Facilities and the Constitution
When Is an Agricultural Activity a Nuisance?
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Contracts
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
What to Consider Before Buying Farmland
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
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
Is Your Farm or Ranch Protected From a Warrantless Search?
Durango Conference and Recent Developments in the Courts
Environmental Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
“Top Tan” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 3) – New Regulatory Definition of “Habitat” under the ESA
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
Estate Planning
Other Important Developments in Agricultural Law and Taxation
Other Important Developments in Agricultural Law and Taxation (Part 2)
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
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
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Family Settlement Agreement – Is it a Good Idea?
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
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
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
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Ag Law (and Medicaid Planning) Court Developments of Interest
Joint Tenancy and Income Tax Basis At Death
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)
IRS Modifies Portability Election Rule
Income Tax
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Purchase and Sale Allocations Involving CRP Contracts
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?
Proper Tax Reporting of Breeding Fees for Farmers
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
Expense Method Depreciation and Leasing- A Potential Trap
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
income Tax Deferral of Crop Insurance Proceeds
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
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
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
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
Joint Tenancy and Income Tax Basis At Death
Tax Court Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2022/05/tax-court-caselaw-update.html
Deducting Soil and Water Conservation Expenses
Correcting Depreciation Errors (Including Bonus Elections and Computations)
When Can Business Deductions First Be Claimed?
Recent Court Decisions Involving Taxes and Real Estate
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
Tax Issues with Customer Loyalty Reward Programs
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
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal with Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What to Consider Before Buying Farmland
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
Recent Court Decisions Involving Taxes and Real Estate
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
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
Tax Deal Struck? – and Recent Ag-Related Cases
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
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
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
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
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
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
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
Water Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Durango Conference and Recent Developments in the Courts
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)
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, July 28, 2022
Tax Deal Struck? – and Recent Ag-Related Cases
Overview
Reports are that Senator Joe Manchin has come to an agreement with Senate leadership on tax legislation that is part of a larger package, termed the “Inflation Reduction Act of 2022.” It’s apparently part of the 2022 budget reconciliation bill which only requires a simple majority of the Senate to pass. What are the tax provisions that have been agreed to?
Proposed tax provisions apparently agreed to, and some recent ag-related court decisions – it’s the topic of today’s post.
Tax Agreement
Reports are that the agreed upon tax package includes a 15 percent corporate alternative minimum tax (AMT) applied to adjusted financial statement income of corporations with profits exceeding $1 billion. A corporation subject to the AMT would be able to claim net operating losses and tax credits against the AMT. In addition, a corporation subject to the AMT would be able to claim tax credits against the AMT as well as regular corporate tax for AMT paid in prior years to the extent the regular tax liability in any year exceeds 15 percent of the corporation’s adjusted financial statement income. The provision would be effective for tax years after 2022.
Also included in the agreement is a change in the tax treatment of carried interest (e.g., the share of profit that general partners receive to compensate them for managing a venture capital fund).
Another proposal would apply the net investment income tax (NIIT) of I.R.C. §1411 to all income. Presently this 3.8 percent tax (which was created as part of Obamacare) applies only to passive income above a threshold. Under the proposal, the additional 3.8 percent tax would apply to adjusted gross income over $400,000 (single) and $500,000 (mfj). This means that there is a substantial “marriage penalty.” In addition, the qualified business income deduction (QBID) of I.R.C. §199A is not part of a taxpayer’s AGI computation. In other words, AGI is not reduced by the 20 percent QBID – AGI is computed before accounting for the QBID. Thus, for a taxpayer that has taxable income at or below the threshold for application of the NIIT as a result of the QBID, the NIIT would be computed on AGI first.
Note: Applying the NIIT to adjusted gross income (including income from both passive and active sources) could result in a sizeable tax increase for many farmers – particularly dairy operations.
There are other tax provisions reported to be in the agreement, including those dealing with “renewable” energy credits. The projected additional revenue from the tax increases is to fund certain “green energy” initiative. The actual text of the legislation is presently slated for the Senate parliamentarian to review on August 3. Full Senate consideration would occur after that date.
Note: There presently is no word on how Senator Sinema views the proposal, although she has stated in the past that she will not support legislation that increases corporate or personal tax rates. While the proposals don’t increase actual rates, they do increase effective rates on certain corporations and individuals.
Also, Senate Finance Committee Chairman Charles Grassley has introduced legislation that would index certain tax benefits to adjust for inflation. The indexed provisions include certain tax credits and deductions such as the Child Tax Credit and the Non-Child Dependent Credit. The bill, known as the “Family and Community Inflation Relief Act,” would also adjust for inflation the American Opportunity Tax Credit, Lifetime Learning Credit, and the Student Loan Interest Deduction. The proposal would also extent the current $10,000 limitation on state and local taxes through 2026.
Recent Ag-Related Court Opinions
Child Support Obligation Computed Based on All Income and Loss from Farming.
Gerving v. Gerving, 969 N.W.2d 184 (N.D. 2022)
The issue in this case was the proper way to calculate a father’s child support obligation. The father conducted a farming operation, and a primary issue was whether only income and gains from farming should count for purposes of child support, or whether losses should also be accounted for. Under child support guidelines, the court must determine the payor’s net income and use that amount to calculate the child support obligation. The trial court calculated the father’s income based only on gains and did not include any related losses incurred from equipment trades and other farm-related transactions. The appellate court held that the trial court erred by not including the farm losses to calculate the father’s self-employment income because those losses must be considered to show actual profit from the farming operation. The appellate court also determined that the father had no income from subleases of farmland.
Deduction for Full Amount of C Corporate Shareholder Compensation Not Deductible
Clary Hood, Inc. v. Comr., T.C. Memo. 2022-15
A big audit issue for farming (and other) corporations is reasonable compensation. This case illustrates that point in a non-farm context. Here, a married couple were the sole shareholders of the petitioner, a corporation engaged in the construction business that graded and prepared land. The petitioner’s growth was irregular from 2000 on. The principal took a relatively modest salary between 2000 and 2012 but took a big increase in the years 2013 to 2016, ostensibly to compensate for earlier years. The company had an outside consulting firm perform an analysis to determine what the principal's compensation should be. The IRS challenged the amount in 2015 and 2016.
The Tax Court examined the usual factors considered in such a case including the employee's qualifications; the nature, extent, and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with gross income and net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; and the salary policy of the taxpayer as to all employees. The Tax Court denied a deduction for the full amount of the compensation. In addition, the IRS assessed an accuracy-related penalty for both years. The taxpayer was able to show that he relied in good faith on the advice of the accounting firm and the Tax Court did not sustain the penalty. However, for the second year the taxpayer could not substantiate its reliance on the outside adviser.
Homeowner’s Policy Doesn’t Cover Farming Injury
Mills v. CSAA General Insurance. Co., No. 21-CV-0479-CVE-JFJ, 2022 U.S. Dist. LEXIS 114741 (N.D. Okla. Jun. 29, 2022)
It’s always good to make sure you understand the extent of coverage you have under an insurance policy, and what is excluded from coverage. This case illustrates that point. Here, the plaintiff became pinned between a trailer and barn while loading cattle, and was hospitalized for several days as a result of his resulting injuries. The plaintiff had a homeowner’s insurance policy with the defendant and filed a claim for coverage under the policy for his injuries. The defendant denied coverage on the basis that the policy only covered claims for bodily or personal injury brought by third parties against the plaintiff, and that the farming endorsement did not extend coverage for the plaintiff’s own bodily injury and incorporated the policy’s exclusion for bodily injury into the farming endorsement.
The plaintiff sued, claiming that he intended to purchase coverage for personal injuries he might suffer while operating his farm and that he had a reasonable expectation of coverage under the policy. He also claimed that the exclusions were “buried in the more than 100 pages of the policy.” The trial court disagreed, determining that the policy’s liability provisions applied only to claims for bodily or personal injury brought by third parties against the plaintiff. The trial court also determined that the policy language was not ambiguous and was not “buried deep” into the policy documents.
Gross Acres, not Tillable Acres, Used for Partition-in-Kind
Mueggenberg v. Mueggenberg, No. 21-0887, 2022 Iowa App. LEXIS 510 (Iowa Ct. App. Jun. 29, 2022)
The two parties were comprised of five siblings, who each had an undivided one-fifth interest in 179.61 acres of farmland. The plaintiffs, three of the siblings, filed for a partition in kind. The court appointed an appraiser to analyze and equally divide the farmland between the three parties. The appraiser determined that partitioning the land into five equal sections would be unworkable because the land’s topography varied greatly. The appraiser recommended the defendants should receive an approximate share of 40 percent comprised of 62 gross acres and all the future easement payments from the energy company that operated a windmill on the land. The appraiser allocated 117.61 gross acres to the plaintiffs. The defendants claimed that they were entitled to 68.64 tillable acres. The appraiser explained that while the acre division was not necessarily 40/60, the land awarded to the defendants was overall more desirable and expensive as it had a higher CSR2 rating.
The trial court agreed with the appraiser and assessed fees and costs to the defendants. On appeal, the appellate court found the defendants’ calculations for a different split were inaccurate as the defendants used tillable acres when they should have used gross acres in the calculation. The defendants also failed to account for the difficulty of dividing the land caused by a non-uniform property line and the existence of terraces. The appellate court affirmed the trial court’s decision to adopt the appraiser’s division but reversed the trial court’s award of attorney’s fees and costs. Accordingly, the appellate court vacated the trial court’s assessment of costs and remanded the case with instructions that only costs arising from the contested matter be assessed to the defendants. The parties were to share all remaining costs proportionately.
Conclusion
Keep your eyes on what, if any, tax proposals come out of the Senate. Increasing taxes on individuals whether via the NIIT or the corporate tax in a recessionary economy (despite the changed definition from the White House) is not a good idea. It’s particularly a bad idea when any additional revenue is to be used to fund inefficient and costly energy proposals to further energy policies that are the driver to the current inflationary problems in the economy.
On the ag law front, make sure to understand how child support is computed in the context of a farmer’s divorce; pay reasonable compensation to shareholder/offices for services rendered; know what is and what is not covered under an insurance policy; and avoid partition actions – they rarely end up in family harmony.
July 28, 2022 in Civil Liabilities, Income Tax, Insurance, Real Property | Permalink | Comments (0)
Saturday, July 23, 2022
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Overview
Dicamba is a broad-spectrum herbicide that was first registered in 1967. But, over the past several years, spray-drift issues associated with Dicamba have been happening. Around 2016, Dicamba's use came under significant scrutiny due to its tendency to vaporize from treated fields and spread to neighboring crops. Incidents in which dicamba affected neighboring fields led to complaints from farmers and fines in some states. A lower volatility formulation, M1768, was approved by the EPA in November 2016. Dicamba formulations, including those registered in the late 2010s, can be especially prone to volatility, temperature inversions and drift.
Much of the problem has been with the use of XtendiMax with VaporGrip (Monsanto (now Bayer)) and Engenia (BASF) herbicides for use with Xtend soybeans and cotton as Dicamba usage increased in an attempt to control weeds in fields planted with crops that are engineered to withstand it. Monsanto began offering crops resistant to Dicamba before a reformulated and drift resistant herbicide had gained Environmental Protection Agency (EPA) approval. The drift issues became bad enough that some states (e.g., Missouri and Arkansas) banned Dicamba because of drift-related damage issues. The U.S. Environmental Protection Agency imposed restrictions on the use of dicamba in November 2018.
What factors help determine the proper application of Dicamba? If drift occurs and damages crops in an adjacent field, how should the problem be addressed? Can the matter be settled privately by the parties involved? If not, what legal standard applies in resolving the matter – negligence or strict liability? Will punitive damages be awarded? If so, will a large jury verdict awarding punitive damages be upheld?
Issues associated with Dicamba drift – that’s the focus of today’s post.
Uniqueness of Dicamba
In many instances, spray drift is a straightforward matter. The typical scenario involves either applying chemicals in conditions that are unfavorable (such as high wind), or a misapplication (such as not following recommended application instructions). But, Dicamba is a unique product with its own unique application protocol.
Consider the following observations:
- Dicamba is a very volatile chemical and is rarely sprayed in the summer months. This is because when the temperature reaches approximately 90 degrees Fahrenheit, dicamba will vaporize such that it can be carried by wind for several miles. This can occur even days after application.
- The typical causes of spray drift are application when winds are too strong or a misapplication of the chemical.
- For the newer Dicamba soybeans, chemical manufacturers reformulated the active ingredient to minimize the chance that it would move off-target due to it volatility.
- Studies have concluded that the new formulations are safe when applied properly, but if a user mixes-in unapproved chemicals, additives or fertilizer, the safe formulations revert to the base dicamba formulation with the attendant higher likelihood of off-target drift.
- Soybeans have an inherit low tolerance to dicamba. As low as 1/20,000 of an application rate can cause a reaction. A 1/1000 of rate can cause yield loss.
- The majority of damaged crops are may not actually result in yield loss. That’s particularly the case if drift damage occurs before flowering. However, if the drift damage occurs post-flowering the likelihood of yield loss increases.
Damage Claims – Building a Case
Negligence. For a person to be deemed legally negligent, certain elements must exist. These elements can be thought of as links in a chain. Each element must be present before a finding of negligence can be obtained. The first element is that of a legal duty giving rise to a standard of care. To be liable for a negligent tort, the defendant's conduct must have fallen below that of a “reasonable and prudent person” under the circumstances. A reasonable and prudent person is what a jury has in mind when they measure an individual's conduct in retrospect - after the fact, when the case is in court. The conduct of a particular tortfeasor (the one causing the tort) who is not held out as a professional is compared with the mythical standard of conduct of the reasonable and prudent person in terms of judgment, knowledge, perception, experience, skill, physical, mental and emotional characteristics as well as age and sanity. For those held out as having the knowledge, skill, experience or education of a professional, the standard of care reflects those factors. For example, the standard applicable to a farmer applying chemicals to crops is what a reasonably prudent farmer would have done under the circumstances, not what a reasonably prudent person would do.
If a legal duty exists, it is necessary to determine whether the defendant's conduct fell short of the conduct of a “reasonable and prudent person (or professional) under the circumstances.” This is called a breach, and is the second element of a negligent tort case.
Once a legal duty and breach of that duty are shown to exist, a causal connection (the third element) must be established between the defendant's act and (the fourth element) the plaintiff's injuries (whether to person or property). In other words, the resulting harm to the plaintiff must have been a reasonably foreseeable result of the defendant's conduct at the time the conduct occurred. Reasonable foreseeability is the essence of causality (also known as proximate cause).
For a plaintiff to prevail in a negligence-type tort case, the plaintiff bears the burden of proof to all four elements by a preponderance of the evidence (just over 50 percent).
Typical drift case. In a straightforward drift case, the four elements are typically satisfied – the defendant misapplied the chemical or did so in high winds (breach of duty to apply chemicals in a reasonable manner in accordance with industry standards/requirements) resulting in damages to another party’s crops. In addition, the plaintiff is able to pin-down where the drift came from by weather reports for the day of application combined with talking with neighbors to determine the source of the drift (causation). In many of these situations, a solution is worked out privately between the parties. In other situations, the disaffected farmer could file a complaint with the state and the state would begin an investigation which could result in a damage award or litigation.
Generally, what are contributing factors to ag chemical drift? For starters, the liquid spray solution of all herbicides can physically drift off-target. This often occurs due to misapplication including such things as applying when wind speed exceeds the recommended velocity, improper spray pressure, and not setting the nozzle height at the proper level above the canopy of the intended plant target. Clearly, not shielding sprayers and aerial application can result in an increased chance of off-site drift. Also, the possibility of drift to an unintended field can be influenced by droplet size if the appropriate nozzle is not utilized.
Dicamba drift cases. As noted above, dicamba is a different product that is more volatile than other crop chemicals. That volatility and the increased likelihood of drift over a broader geographic area makes it more difficult for a plaintiff to determine the source of the drift. Thus, the causation element of the plaintiff’s tort claim is more difficult to establish. In addition, soybeans are inherently sensitive to extremely low dicamba concentrations, thus elevating the potential for damages.
Dicamba manufacturers have protocols in place to aid in the safe application of the products. Thus, in quantifiable damage cases, it is likely that an application protocol was not followed. But, establishing that breach to the satisfaction of a jury could be steep uphill climb for a plaintiff. That’s particularly the case with dicamba given its heightened volatility. Damages could be caused by physical drift, temperature, volatility or temperature inversions. Is a particular cause tied to the defendant’s breach of a duty owed to the plaintiff?
Clear patterns of injury indicate physical drift which could make the causation element easier to satisfy. Wind speed at time of application, sprayer speed, sprayer boom height above the plant canopy and nozzle height are also factors that are within the applicator’s control. Failure to meet common industry standards or manufacturer guidance on any of those points could point toward the breach of a duty and could also weigh on the causation element of a tort claim.
Relatedly, another factor with dicamba, as noted above, is whether it was applied on a hot day. The chemistry of dicamba has a “vapor curve” that rises with the temperature. While I have not seen that vapor curve, it would be interesting to see whether that curve has a discernibly steeper slope at a particular temperature. If so, that would indicate the point at which dicamba becomes very volatile and should not be applied. To the extent any particular defendant can establish would be able to establish application beyond that temperature, the duty and breach elements of the plaintiff’s tort claim would be easier to satisfy.
Strict liability. Most pesticide drift cases not involving aerially-applied chemicals are handled under the negligence standard. However, a strict liability approach is sometimes utilized for aerially applied chemicals. See, e.g., Langan v. Valicopters, Inc., 567 P.2d 218 (Wash. 1977); but see Mangrum v. Pique, et al., 359 Ark. 373, 198 S.W.3d 496 (2006)(the aerial application of chemicals commonly used in farming communities that are available for sale to the general public is not an ultrahazardous activity triggering application of strict liability). In such a situation, liability results from damages to others as a result of the chemicals. It makes no difference whether the applicator followed all applicable rules for applying the chemicals and did so without negligence. The strict liability rule is harsh, and is normally reserved for ultra-hazardous activities.
The Bader Farms Litigation
The lawsuit – claims and motions. In Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019), the plaintiff is Missouri’s largest peach farming operation and is located in the southeast part of the state. claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) allegedly conspired to develop and market Dicamba-tolerant seeds and Dicamba-based herbicides. The suit alleged that the two companies collaborated on Xtend (herbicide resistant cotton seed) that was intended for use with a less volatile form of Dicamba with less drift potential. But, as of 2015 neither Monsanto nor BASF had produced the new, less volatile, form of Dicamba. That fact led the plaintiff to claim that the defendants released the Dicamba-tolerant seed with no corresponding Dicamba herbicide that could be safely applied. As a result, the plaintiff claimed, farmers illegally sprayed an old formulation of Dicamba that was unapproved for in-crop, over-the-top, use and was highly volatile and prone to drift. The plaintiff claimed its annual peach crop revenue exceeded $2 million before the drift damage, and an expert at trial asserted that the drift caused the plaintiff to lose over $20 million in profits. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. The plaintiff’s suit also involved claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act (MCPA); civil conspiracy; and joint liability for punitive damages.
Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the MCPA; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the MCPA claims. The trial court noted that civil actions under the MCPA are limited to “field crops” which did not include peaches. The trial court, however, did not dismiss the civil conspiracy claim based on concerted action by agreement, but did dismiss the aiding and abetting portion of the claim because that cause of action is not recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant
Note: The case went to trial in early 2020 and was one of more than 100 similar Dicamba lawsuits. Bayer, which acquired Monsanto in 2018 for $63 billion, announced in June of 2020 that it would settle dicamba lawsuits for up to $400 million.
The jury trial. At trial, the jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and that both defendants had done so for 2017 to the time of trial. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict considering the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020).
BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million (from $250 million) after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
Appellate decision. In Hahn v. Monsanto Corp., No. 20-3663, 2021 U.S. App. LEXIS 18621 (8th Cir. Jul. 7, 2022), the appellate court partially affirmed the trial court, partially reversed, and remanded the case. The appellate court determined that the trial court incorrectly instructed the jury to assess punitive damages for Bayer (i.e., Monsanto) and BASF together, rather than separately, and that a new trial was needed to determine punitive damages for each company. Indeed, the appellate court vacated the punitive damages award and remanded the case to the trial court with instructions to hold a new trial only on the issue of punitive damages.
However, the appellate court did not disturb the trial court’s jury verdict of $15 million in compensatory damages. On the compensatory damages issue, the appellate court held that the trial court properly refused to find intervening cause as a matter of law for the damage to the plaintiff’s peaches. On that point, the appellate court determined that the spraying of Dicamba on a nearby farm did not interrupt the chain of events which meant that the question of proximate cause of the damage was proper for the jury to determine. The appellate court also held that the was an adequate basis for the plaintiff’s lost profits because the award was not based on speculation. The appellate court noted that the peach orchard had been productive for decades, and financial statements along with expert witness testimony calculated approximately $20.9 million in actual damages. The appellate court also determined that the facts supported the jury’s determination that the defendants engaged in a conspiracy via unlawful means – knowingly enabling the widespread use of Dicamba during growing season to increase seed sales.
Conclusion
The Dicamba drift issue has been an important one in agriculture for a few years, particularly with respect to soybean and cotton crops. But, as the Bader Farms litigation shows, Dicamba drift can also impact other crops. While the new Dicamba formulations will not eliminate the problem of physical drift, proper application procedures can go a long way to minimizing it. Likewise, drift issues can also be minimized by communication among farmers to help determine the planting location of particular crops, their relative sensitivities to Dicamba and the necessary setbacks.
July 23, 2022 in Civil Liabilities | Permalink | Comments (0)
Wednesday, July 13, 2022
Durango Conference and Recent Developments in the Courts
Overview
On August 1 and 2, Washburn Law School will be hosting a two-day conference on income tax as well as estate and business planning. Of course, the event emphasizes the application of tax and legal principles to ag producers and rural landowners, but many of the concepts are of general application. One of the featured sessions at the Durango conference will focus on water rights and how those impact income tax and estate planning for farmers, ranchers and rural landowners. Of course, throughout the two days we will be covering many issues that apply to clients in a host of possible situations.
In today’s post, I focus on the Durango water rights session and a few court developments.
Appropriation Water Rights - Tax and Estate Planning Issues (Durango Conference)
This panel session begins with Andy Morehead, an accountant from Eaton, CO, explaining why we are talking about appropriation water rights in tax and estate planning. The importance of the topic relates to the value of water rights. Andy will talk about his experience concerning sales and other projects where water rights significantly increased the wealth of individuals, families or entities.
In Colorado, almost 4,000 wells have been shut in by the State Engineer in the past two decades to maintain streamflow and satisfy downstream priority claims. A similar number have had their pumping rights limited in some way. Given the rapid development occurring in northeast Colorado and the need for water for the new subdivisions along the front range, there will be major political ramifications if any further reductions are made. The economic impact is already being felt. A unit (one acre foot) of Colorado Big Thompson storage water now sells for about $65,000. Approximately 15 years ago, the same volume of water sold for $6,000. This enhanced value has a significant impact on estates, as does any land with associated water rights.
Following Andy’s opening discussion, John Howe, an attorney in Grand Junction, CO, will follow. His practice focuses on real estate matters including the leasing of water rights. John will explain the nature of an appropriation water right, and will also discuss surface rights, tributary and non-tributary groundwater. John will also address nuances in the adjudication system and the chief engineer’s agency. Of particular interest to tax practitioners is whether a right to use water is an ownership interest in real property or a right to use water that is personal property. John will discuss the real/personal property determination. Of course, the focus will be on Colorado, but John may also comment on the real/personal property distinction in adjoining states. He will also share his experiences with business and succession planning title issues involving water rights and focus on a few of the most common title mistakes made with water right dispositions related to estate planning, divorce, financing and foreclosure, and entity dissolution or division.
Mike Ramsey, a long-time water law practitioner in Garden City, Kansas, will follow John’s discussion by addressing approaches to the valuation of water rights and depletion issues. Mike will also discuss I.R.C. §1031 exchanges involving disposition of water rights that are interests on real property and other estate tax planning issues associated with water right ownership.
The Durango conference is going to be a good one that you will want to be a part of, either in-person or online. For further details about the two-day event click here: https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html
Recent Court Developments
Defendant Properly Sentenced for Falsely Obtaining PPP and EIDL Loans
United States v. Stout, No. 21-1938, 2022 U.S. App. LEXIS 16627 (8th Cir. Jun. 16, 2022)
The defendant was sentenced to 12 months and 1 day in prison followed by 3 years of supervised release and $74,600 in restitution for misrepresenting (along with his wife and his sister) that they owned multiple businesses in order to obtain forgivable Paycheck Protection Program (PPP) loans as well as non-forgivable loans under the Economic Injury Disaster Loan program. The defendant admitted being the ringleader of the scheme. The court determined the “intended-loss,” the monetary harm the defendant purposely sought to inflict, was $116,525.56. The amount was calculated using pre-sentence investigation reports. The defendant claimed that his sentence should be reduced on the basis that the trial court should have limited the loss only to the PPP loans.
The defendant claimed there was no evidence he did not intend to repay the non-forgivable loans, and relied on a 1999 case involving a rancher that misrepresented the number of cattle he owned in order to obtain a loan. But the rancher in that case took multiple remedial actions to repay the falsely obtained loans such as selling his ranch and equipment, starting a new business, and financing his debt. The appellate court determined that the previous case was not like the defendant’s situation. The defendant provided no evidence that he would do anything to repay the loans and had no businesses that would allow him to repay the loans. The appellate court also concluded that the trial court did not err in considering the defendant’s past fraudulent actions of pawning stolen work computers as a reflection of the defendant’s character. As a result, the appellate court upheld the trial court’s sentencing determination.
Shareholders Liable for Corporate Tax under “Midco” Transaction.
Sloan v. Comr., T.C. Memo. 2022-6, on rem. from, 896 F.3d 1083 (9th Cir. 2018), rev’g., T.C. Memo. 2016-115, cert. den., 139 S. Ct. 1348 (2019)
A “Midco” transaction designed to avoid the tax on built-in-gain (BIG) inherent in the appreciation of assets held in a C corporation. Under a “Midco” transaction the seller engages in a stock sale while the buyer engages in an asset purchase through use of an intermediary company. The sale of stock avoids triggering the BIG tax and the purchaser gets a purchase price income tax basis in the assets. The IRS, however, often takes the position that the parties engaged in a Midco transaction have tax liability exposure under I.R.C. §6901as a transferee for unpaid taxes and interest on the basis that the selling shareholder. The IRS could also impose penalties on the transferee parties. The basic issue is whether the selling shareholder knew or should have known that the intermediary company would incur a tax liability that it had no ability to pay.
In this case, the petitioners were transferees of C corporate assets via a typical “Midco” transaction where an intermediary company was affiliated with a promoter. The intermediary company was merely a “shell” company organized offshore that buy the shares of the target company. The cash of the petitioner’s C corporation (target corporation) flowed through the intermediary to the selling shareholders. After acquiring the target’s embedded tax liability, the shell company engaged in a transaction purporting to offset the target's realized gains and eliminate the corporate-level tax. The promoter and the target's shareholders then agreed to split the dollar value of the corporate tax that had purportedly been avoided with the promoter keeping as its fee a negotiated percentage of the avoided tax amount. The target's shareholders kept the balance of the avoided corporate tax as a premium above the target's true net asset value (i.e., assets net of accrued tax liability).
After the transaction there were no assets left in the target corporation and the IRS issued notices of liability to the petitioners as transferees. In the original Tax Court case, the Tax Court ruled that the petitioners were not liable as transferees on the theory that they and their advisers did not have actual or constructive knowledge of the results of the transaction. On appeal, the appellate court reversed, concluding that the petitioners were at the very least on constructive notice that the entire scheme had no purpose other than tax avoidance. The appellate court also concluded the transfer was a constructively fraudulent transfer under Arizona law. The U.S. Supreme Court declined to hear the case. On remand, the Tax Court entered a decision consistent with the IRS’ computations. Those computations included accuracy-related penalties and IRS recovery of pre-notice interest.
Iowa Law Providing Limited Nuisance Immunity to CAFOs Upheld
Garrison v. New Fashion Pork LLP, No. 21-0652, 2022 Iowa Sup. LEXIS 86 (Iowa Sup. Ct. Jun. 30, 2022)
The plaintiff claimed that the defendant’s neighboring confined animal feeding operation (CAFO) violated both the Clean Water Act and the Resource Conservation Recovery Act due to manure runoff that caused excessive nitrate levels in the plaintiff’s water sources. The federal court dismissed the suit on summary judgment for lack of expert testimony to establish the plaintiff’s claim, finding that the alleged violations where wholly past violations, and that water test results showed no ongoing violation of either statute, but rather a slight decrease in nitrate levels since the start of the defendant’s confined animal feeding operation (CAFO). The federal court also declined supplemental jurisdiction over the plaintiff’s state law claims. The plaintiff then sued the defendant in state court for nuisance, trespass and violation of state drainage law. The defendant moved for summary judgment based on statutory immunity of Iowa Code § 657.11 and the plaintiff’s lack of evidence or expert testimony.
Iowa Code §657.11 provides limited nuisance immunity to a CAFO. Immunity is granted if the CAFO is following all applicable regulations and is using accepted management practices. The plaintiff, relying on Gacke v. Pork XTRA, L.L.C., 684 N.W. 2d 168 (Iowa 2004) claimed that Iowa Code §657.11 as applied to him was unconstitutional under Iowa’s inalienable rights clause. Under Gacke, for a court to determine whether Iowa Code §657.11(2) is unconstitutional a plaintiff must show they (1) “receive[d] no particular benefit from the nuisance immunity granted to their neighbors other than that inuring to the public in general[,]”; (2) “sustain[ed] significant hardship[,]”; and (3) “resided on their property long before any animal operation was commenced” on neighboring land and “had spent considerable sums of money in improvements to their property prior to construction of the defendant’s facilities.” All three elements must be established.
The trial court, noting that the plaintiff’s own CAFO (raising of 500 ewes, and at times over 1,000 ewes and lambs, on his property for over 40 years, along with a six-foot tall manure pile) had benefited from immunity, rejected the plaintiff’s constitutional challenge for failure to satisfy Gacke’s three-part test in Gacke. The trial court then granted the defendant’s summary judgment motion based on the plaintiff’s failure to provide any expert testimony or other evidence to support any exception to the statutory immunity defense or to prove causation or damages.
On further review, the Iowa Supreme Court affirmed, overruled the three-part test of Gacke and applied rational basis review to reject the plaintiff’s constitutional challenge to Iowa Code §657.11. The court noted that Iowa Code §657.11A did not eliminate nuisance claims against CAFOs, but rather established reasonable limitations on recovery rights. The Iowa Supreme Court concluded that the plaintiff failed to preserve error on his takings claim under article I, section 18 of the Iowa Constitution and failed to generate a question of fact precluding summary judgment on statutory nuisance immunity or causation for his trespass and drainage claims. Specifically, the Iowa Supreme Court noted that without accompanying expert testimony, the plaintiff water tests showed neither an increase in nitrate levels nor a spike in nitrate levels that would correlate with manure spreading. The Supreme Court further noted that even assuming an increase in nitrate levels, the plaintiff lacked expert testimony to attribute or correlate any increase in nitrate levels in the stream to the defendants’ actions. Thus, without expert witness testimony that tied the defendant’s alleged misapplication or over-application of manure to the nitrate levels in the plaintiff’s stream, the plaintiff could not, as a matter of law, satisfy his burden of proving that any trespass or drainage violation proximately caused his damages. The Iowa Supreme Court did not address the plaintiff’s constitutional challenge to the damages limitations in Iowa Code §657.11A(3).
Note: The Iowa Supreme Court’s opinion didn’t explain how the attorneys for the plaintiff failed to preserve error on the plaintiff’s takings claim and failed to provide expert witness testimony on the tort claims for trespass and drainage issues. However, the Iowa Supreme Court clearly focused on those deficiencies in its opinion.
Conclusion
Agricultural law and taxation is a dynamic area of the law focusing on the legal rules surrounding food production, water rights and allocation, and the production and usage of energy. Of course, taxation is wrapped around all of those issues, as are estate, business and succession planning. All of these issues will be addressed at the upcoming conference in Durango, CO on Aug. 1 and 2. While it’s not the same as being there in person the online attendance platform allows you to participate from your own location.
I am looking forward to seeing you there, or online.
July 13, 2022 in Business Planning, Civil Liabilities, Criminal Liabilities, Water Law | Permalink | Comments (0)
Thursday, June 16, 2022
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Overview
Agricultural law touches many aspects of the daily life of a farmer, rancher, or anyone using an ag-related product or service. In today’s post, I provide a small sample illustrating that very point.
Some additional ag law-related developments – it’s the topic of today’s post.
Claims Against Dog Food Producer Wrongfully Dismissed
Kucharski-Berger v. Hill's Pet Nutrition, Inc., 60 Kan. App. 2d 510, 494 P.3d 283 (Kan, Ct. App. 2021)
A veterinarian prescribed Hill’s Pet Nutrition dog food for the plaintiff’s dog. The plaintiff sued Hill’s Pet Nutrition upon discovering that the dog food did not contain medicine or drugs, had not been tested and approved for medicinal purposes by the FDA, but was priced higher than “normal” dog food. The plaintiff claimed the defendant and other pet food manufacturers had conspired to monopolize the prescription pet food market and they had artificially inflated the prices by claiming the food required a prescription. No federal or state law required pet food to be sold with a prescription from a vet. The plaintiff claimed the defendant had violated the Kansas Restraint of Trade Act (KRTA) and the Kansas Consumers Protection Act (KCPA) and also brought an unjust enrichment claim. The trial court dismissed the case for failure to state a claim under KCPA, the plaintiff had to allege that the defendant was engaged in a deceptive act or practice involving the plaintiff that caused the plaintiff damages. The plaintiff claimed that the defendant had misrepresented that the dog food required a prescription so as to sell at a premium price. The appellate court determined that the plaintiff had clearly alleged sufficient facts to put the defendant on notice of the allegations under the KCPA. The defendant claimed that the plaintiff failed to show a causal connection between the prescription practices and the injury, but the appellate court noted that the plaintiff did not need to show she was misled, only that the defendant’s actions were deceptive. On that point, the appellate court noted that the plaintiff had provided enough detail in the complaint to show that the prescription requirement could be deceptive and was the cause of her spending more money (the injury). As such, the plaintiff’s KCPA claims should not have been dismissed. With respect to the KRTA claim, the court noted that the plaintiff was required to allege that the defendant was creating a restriction in trade, increasing or reducing the price of merchandise to prevent competition, and had entered into an agreement establishing a set price for a good in the market. The plaintiff alleged the defendant had entered into a contract with other dog food producers to set prices higher for prescription dog food, which violated KRTA. The plaintiff also claimed that the defendant had entered into a conspiracy to monopolize the prescription dog food market. As such, the appellate court held that the plaintiff had properly presented the KRTA claims. The appellate court reversed the trial court’s dismissal and remanded the case for furthering proceedings.
Oil and Gas Developments
Fracking Water Not Taxable
CDOR PLR 22-001 (Apr. 8, 2022)
A Colorado company sold non-potable river water to oil and gas producers for use in hydraulic fracturing and sought guidance from the Colorado Department of Revenue (CDOR) as to its taxability. The company delivers water by withdrawing it from ditch and reservoir systems, securing rights-of-way, and laying temporary surface lines to the customers’ locations. The CDOR concluded that the company did not owe sales tax because water in conduits, pipes, ditches and reservoirs is not subject to sales tax.
Colorado Changes Oil and Gas Severance Tax Credit
H.B. 1391, signed into law on June 7, 2022.
Colorado H.B. 1391 was signed into law on June 7, 2022 and changes the calculation of the oil and gas severance tax credit. Beginning January 1, 2025, the credit will be calculated as 76.56 percent of the gross income attributable to the well in the current tax year, multiplied by the local mill rate of the prior year. Under prior law, the credit was 87.5 percent of the prior year’s local taxes, which are assessed at 87.5 percent of the gross income of the prior year and are subject to the prior year’s local mill levies. The change is intended to simplify the credit’s calculation and eliminate the one-year lag in its administration. Well operators, rather than royalty interest owners will be responsible for the tax.
Low-Producing Oil and Gas Tax Exemption Tied to Actual Projection.
Farmer v. Board of Ellis County Commissioners, Nos. 123,488 & 123,489, 2022 Kan. App. LEXIS 19 (Kan. Ct. App. May 6, 2022)
The taxpayer sought a refund for property tax exemptions under state law (K.S.A. 79-201t) for tax year 2018 for several oil and gas leases on his property for low-producing oil and gas wells (less than five barrels per day. The Board of Tax Appeals (BOTA) denied the refund on the basis that it would be retrospective and concluded that the taxpayer should pay the amount of tax based on the predicted production for 2018 rather than actual production. At the trial court, BOTA argued the leases should not be exempt because the 2017 production that was used to find the fair market value for taxes for 2018 was not at the exempt level. BOTA claimed the first time the taxpayers would qualify for the exemption would be in 2019 as the 2018 oil production would be used at that time to predict the value that would meet the exemption level. The trial court held the taxpayers should be granted the exemption as the daily average in 2018 fell below the level required for the exemption. On appeal, the appellate court concluded that the statute was unclear on when the exemption could take effect and if a refund could be awarded. The appellate court looked at how BOTA honored tax refunds in the past for taxpayers who filed for an exemption retrospectively. Based on legislative intent, the appellate court held the intent was clearly to allow tax exemptions on the first day an oil well would qualify. The appellate court held that the taxpayer should be refunded property tax if the well actually produced at exempt levels instead of the projected production levels.
Conclusion
There’s never a dull moment in the ag law and tax world.
June 16, 2022 in Civil Liabilities, Real Property, Regulatory Law | Permalink | Comments (0)
Sunday, May 22, 2022
2021 Bibliography
Overview
In the past, I have posted bibliographies of my articles by year to help readers researching the various ag tax and ag law topics that I write about. The blog articles are piling up, with more 750 available for you to read and use for your research for clients (and yourself). The citations contained in the articles are linked so that you can go directly to the source. I trust that you find that feature helpful to save you time (and money) in representing clients.
Today, I provide you with the bibliography of my 2021 articles (by topic) as well as the links to the prior blogs containing past years. Many thanks to my research assistant, Kennedy Mayo, for pulling this together for me.
Prior Years
Here are the links to the bibliographies from prior years:
Ag Law and Taxation 2020 Bibliography
https://lawprofessors.typepad.com/agriculturallaw/2021/01/ag-law-and-taxation-2020-bibliography.html
Ag Law and Taxation – 2019 Bibliography
https://lawprofessors.typepad.com/agriculturallaw/2021/02/ag-law-and-taxation-2019-bibliography.html
Ag Law and Taxation – 2018 Bibliography
https://lawprofessors.typepad.com/agriculturallaw/2021/03/ag-law-and-taxation-2018-bibliography.html
Ag Law and Taxation – 2017 Bibliography
https://lawprofessors.typepad.com/agriculturallaw/2021/04/ag-law-and-taxation-2017-bibliography.html
Ag Law and Taxation – 2016 Bibliography
https://lawprofessors.typepad.com/agriculturallaw/2021/04/ag-law-and-taxation-2016-bibliography.html
2021 Bibliography
Below are the links to my 2021 articles, by category:
BANKRUPTCY
The “Almost Tope Ten” Ag Law and Ag Tax Developments of 2020
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
What’s an “Asset” For Purposes of a Debtor’s Insolvency Computation?
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Is a Tax Refund Exempt in Bankruptcy?
https://lawprofessors.typepad.com/agriculturallaw/2021/06/is-a-tax-refund-exempt-in-bankruptcy.html
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/06/ag-law-and-tax-potpourri.html
Montana Conference and Ag Law Summit (Nebraska)
Farm Bankruptcy – “Stripping,” “Claw-Back” and the Tax Collecting Authorities (Update)
BUSINESS PLANNING
For Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Recent Happenings in Ag Law and Ag Tax
C Corporate Tax Planning; Management Fees and Reasonable Compensation – A Roadmap of What Not to Do
Will the Estate Tax Valuation Regulations Return?
June National Farm Tax and Estate/Business Planning Conference
August National Farm Tax and Estate/Business Planning Conference
C Corporation Compensation Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/03/c-corporation-compensation-issues.html
Planning for Changes to the Federal Estate and Gift Tax System
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
The “Mis” STEP Act – What it Means To Your Estate and Income Tax Plan
Intergenerational Transfer of Family Businesses with Split-Dollar Life Insurance
Ohio Conference -June 7-8 (Ag Economics) What’s Going On in the Ag Economy?
Montana Conference and Ag Law Summit (Nebraska)
Farm Valuation Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/08/farm-valuation-issues.html
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2021/08/ag-law-summit.html
The Illiquidity Problem of Farm and Ranch Estates
When Does a Partnership Exist?
https://lawprofessors.typepad.com/agriculturallaw/2021/09/when-does-a-partnership-exist.html
Gifting Assets Pre-Death – Part One
https://lawprofessors.typepad.com/agriculturallaw/2021/09/gifting-assets-pre-death-part-one.html
Gifting Assets Pre-Death (Entity Interests) – Part Two
Gifting Pre-Death (Partnership Interests) – Part Three
The Future of Ag Tax Policy – Where Is It Headed?
Estate Planning to Protect Assets From Creditors – Dancing On the Line Between Legitimacy and Fraud
Fall 2021 Seminars
https://lawprofessors.typepad.com/agriculturallaw/2021/09/fall-2021-seminars.html
Corporate-Owned Life Insurance – Impact on Corporate Value and Shareholder’s Estate
Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2021/10/caselaw-update.html
S Corporations – Reasonable Compensation; Non-Wage Distributions and a Legislative Proposal
2022 Summer Conferences – Save the Date
https://lawprofessors.typepad.com/agriculturallaw/2021/12/2022-summer-conferences-save-the-date.html
CIVIL LIABILITIES
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Three
Continuing Education Events and Summer Conferences
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Three
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Prescribed Burning Legal Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/02/prescribed-burning-legal-issues.html
Damaged and/or Destroyed Trees and Crops – How is the Loss Measured?
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Mailboxes and Farm Equipment
https://lawprofessors.typepad.com/agriculturallaw/2021/07/mailboxes-and-farm-equipment.html
Statutory Immunity From Liability Associated With Horse-Related Activities
CONTRACTS
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Three
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Deed Reformation – Correcting Mistakes After the Fact
Considerations When Buying Farmland
https://lawprofessors.typepad.com/agriculturallaw/2021/11/considerations-when-buying-farmland.html
Recent Court Decisions of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/12/recent-court-decisions-of-interest.html
The Potential Peril Associated With Deferred Payment Contracts
COOPERATIVES
Continuing Education Events and Summer Conferences
Final Ag/Horticultural Cooperative QBI Regulations Issued
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
CRIMINAL LIABILITIES
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Estate Planning to Protect Assets From Creditors – Dancing On the Line Between Legitimacy and Fraud
Recent Court Decisions of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/12/recent-court-decisions-of-interest.html
ENVIRONMENTAL LAW
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Recent Happenings in Ag Law and Ag Tax
Court and IRS Happenings in Ag Law and Tax
https://lawprofessors.typepad.com/agriculturallaw/2021/03/court-happenings-in-ag-law-and-tax.html
Valuing Ag Real Estate With Environmental Concerns
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/06/ag-law-and-tax-potpourri.html
No Expansion of Public Trust Doctrine in Iowa – Big Implications for Agriculture
Key “Takings” Decision from SCOTUS Involving Ag Businesses
Montana Conference and Ag Law Summit (Nebraska)
Navigable Waters Protection Rule – What’s Going on with WOTUS?
ESTATE PLANNING
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Two
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
What Now? – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2021/02/what-now-part-two.html
Will the Estate Tax Valuation Regulations Return?
June National Farm and Tax and Estate/Business Planning Conference
August National Farm Tax and Estate/Business Planning Conference
Farmland in an Estate – Special Use Valuation and the 25 Percent Test
The Revocable Living Trust – Is it For You?
Summer Conferences – NASBA Certification! (and Some Really Big Estate Planning Issues – Including Basis)
Court Developments of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/04/court-developments-of-interest.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Planning for Changes to the Federal Estate and Gift Tax System
The “Mis” STEP Act – What it Means To Your Estate and Income Tax Plan
The Revocable Trust – What Happens When the Grantor Dies?
Intergenerational Transfer of Family Businesses with Split-Dollar Life Insurance
Ohio Conference –June 7-8 (Ag Economics) What’s Going On in the Ag Economy?
Reimbursement Claims in Estates; Drainage District Assessments
Montana Conference and Ag Law Summit (Nebraska)
Farm Valuation Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/08/farm-valuation-issues.html
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2021/08/ag-law-summit.html
The Illiquidity Problem of Farm and Ranch Estates
Planning to Avoid Elder Abuse
https://lawprofessors.typepad.com/agriculturallaw/2021/08/planning-to-avoid-elder-abuse.html
Gifting Assets Pre-Death – Part One
https://lawprofessors.typepad.com/agriculturallaw/2021/09/gifting-assets-pre-death-part-one.html
Gifting Assets Pre-Death (Entity Interests) – Part Two
The Future of Ag Tax Policy – Where Is It Headed?
Estate Planning to Protect Assets From Creditors – Dancing On the Line Between Legitimacy and Fraud
Tax Happenings – Present Status of Proposed Legislation (and What You Might Do About It)
Corporate-Owned Life Insurance – Impact on Corporate Value and Shareholder’s Estate
Tax (and Estate Planning) Happenings
https://lawprofessors.typepad.com/agriculturallaw/2021/11/tax-and-estate-planning-happenings.html
Selected Tax Provisions of House Bill No. 5376 – and Economic Implications
2022 Summer Conferences – Save the Date
https://lawprofessors.typepad.com/agriculturallaw/2021/12/2022-summer-conferences-save-the-date.html
INCOME TAX
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Two
The “Top Ten” Agricultural Law and Ag Tax Developments of 2020 – Part One
Continuing Education Events and Summer Conferences
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Four
Final Ag/Horticultural Cooperative QBI Regulations Issued
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Recent Happenings in Ag Law and Ag Tax
Deducting Start-Up Costs – When Does the Business Activity Begin?
What Now? – Part One
https://lawprofessors.typepad.com/agriculturallaw/2021/02/what-now-part-one.html
C Corporate Tax Planning; Management Fees and Reasonable Compensation – A Roadmap of What Not to Do
Where’s the Line Between Start-Up Expenses, the Conduct of a Trade or Business and Profit Motive?
June National Farm Tax and Estate/Business Planning Conference
Selling Farm Business Assets – Special Tax Treatment (Part One)
Tax Update Webinar
https://lawprofessors.typepad.com/agriculturallaw/2021/03/tax-update-webinar.html
Selling Farm Business Assets – Special Tax Treatment (Part Two)
Selling Farm Business Assets – Special Tax Treatment (Part Three)
August National Farm Tax and Estate/Business Planning Conference
Court and IRS Happenings in Ag Law and Tax
https://lawprofessors.typepad.com/agriculturallaw/2021/03/court-happenings-in-ag-law-and-tax.html
C Corporation Compensation Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/03/c-corporation-compensation-issues.html
Tax Considerations When Leasing Farmland
Federal Farm Programs and the AGI Computation
Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/04/tax-potpourri.html
What’s an “Asset” For Purposes of a Debtor’s Insolvency Computation?
Summer Conferences – NASBA Certification! (and Some Really Big Estate Planning Issues – Including Basis)
Court Developments of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/04/court-developments-of-interest.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
The “Mis” STEP Act – What it Means To Your Estate and Income Tax Plan
The Revocable Trust – What Happens When the Grantor Dies?
Ohio Conference -June 7-8 (Ag Economics) What’s Going On in the Ag Economy?
What’s the “Beef” With Conservation Easements?
Is a Tax Refund Exempt in Bankruptcy?
https://lawprofessors.typepad.com/agriculturallaw/2021/06/is-a-tax-refund-exempt-in-bankruptcy.html
Tax Court Happenings
https://lawprofessors.typepad.com/agriculturallaw/2021/06/tax-court-happenings.html
IRS Guidance On Farms NOLs
https://lawprofessors.typepad.com/agriculturallaw/2021/07/irs-guidance-on-farm-nols.html
Montana Conference and Ag Law Summit (Nebraska)
Tax Developments in the Courts – The “Tax Home”; Sale of the Home; and Gambling Deductions
Recovering Costs in Tax Litigation
https://lawprofessors.typepad.com/agriculturallaw/2021/07/recovering-costs-in-tax-litigation.html
Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/08/tax-potpourri.html
Weather-Related Sales of Livestock
https://lawprofessors.typepad.com/agriculturallaw/2021/08/weather-related-sales-of-livestock.html
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2021/08/ag-law-summit.html
Livestock Confinement Buildings and S.E. Tax
When Does a Partnership Exist?
https://lawprofessors.typepad.com/agriculturallaw/2021/09/when-does-a-partnership-exist.html
Recent Tax Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2021/09/recent-tax-developments-in-the-courts.html
Gifting Assets Pre-Death – Part One
https://lawprofessors.typepad.com/agriculturallaw/2021/09/gifting-assets-pre-death-part-one.html
Gifting Pre-Death (Partnership Interests) – Part Three
The Future of Ag Tax Policy – Where Is It Headed?
Tax Happenings – Present Statute of Proposed Legislation (and What You Might Do About It)
Fall 2021 Seminars
https://lawprofessors.typepad.com/agriculturallaw/2021/09/fall-2021-seminars.html
Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas
Farm Bankruptcy – “Stripping,” “Claw-Back” and the Tax Collecting Authorities (Update)
Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2021/10/caselaw-update.html
Tax Issues Associated With Easements
https://lawprofessors.typepad.com/agriculturallaw/2021/10/tax-issues-associated-with-easements.html
S Corporations – Reasonable Compensation; Non-Wage Distributions and a Legislative Proposal
Tax Reporting of Sale Transactions By Farmers
The Tax Rules Involving Prepaid Farm Expenses
Self Employment Taxation of CRP Rents – Part One
Self-Employment Taxation of CRP Rents – Part Two
Self-Employment Taxation of CRP Rents – Part Three
Recent IRS Guidance, Tax Legislation and Tax Ethics Seminar/Webinar
Tax (and Estate Planning) Happenings
https://lawprofessors.typepad.com/agriculturallaw/2021/11/tax-and-estate-planning-happenings.html
Selected Tax Provisions of House Bill No. 5376 – and Economic Implications
Recent Court Decisions of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/12/recent-court-decisions-of-interest.html
The Potential Peril Associated With Deferred Payment Contracts
Inland Hurricane – 2021 Version; Is There Any Tax Benefit to Demolishing Farm Buildings and Structures?
2022 Summer Conferences – Save the Date
https://lawprofessors.typepad.com/agriculturallaw/2021/12/2022-summer-conferences-save-the-date.html
The Home Sale Exclusion Rule – How Does it Work When Land is Also Sold?
Gifting Ag Commodities To Children
https://lawprofessors.typepad.com/agriculturallaw/2021/12/gifting-ag-commodities-to-children.html
Livestock Indemnity Payments – What Are They? What Are the Tax Reporting Options?
Commodity Credit Corporation Loans and Elections
INSURANCE
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
REAL PROPERTY
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Three
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Prescribed Burning Legal Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/02/prescribed-burning-legal-issues.html
Ag Zoning Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/02/ag-zoning-potpourri.html
Court and IRS Happenings in Ag Law and Tax
https://lawprofessors.typepad.com/agriculturallaw/2021/03/court-happenings-in-ag-law-and-tax.html
Is That Old Fence Really the Boundary
https://lawprofessors.typepad.com/agriculturallaw/2021/04/is-that-old-fence-really-the-boundary.html
Court Developments of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/04/court-developments-of-interest.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Deed Reformation – Correcting Mistakes After the Fact
Valuing Ag Real Estate With Environmental Concerns
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2021/06/ag-law-and-tax-potpourri.html
Montana Conference and Ag Law Summit (Nebraska)
Farm Valuation Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/08/farm-valuation-issues.html
Considerations When Buying Farmland
https://lawprofessors.typepad.com/agriculturallaw/2021/11/considerations-when-buying-farmland.html
The Home Sale Exclusion Rule – How Does it Work When Land is Also Sold?
REGULATORY LAW
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Two
The “Top Ten” Agricultural Law and Ag Tax Developments of 2020 – Part One
Continuing Education Events and Summer Conferences
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Two
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Four
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Recent Happenings in Ag Law and Ag Tax
Prescribed Burning Legal Issues
https://lawprofessors.typepad.com/agriculturallaw/2021/02/prescribed-burning-legal-issues.html
Packers and Stockyards Act Amended – Additional Protection for Unpaid Cash Sellers of Livestock
Federal Farm Programs and the AGI Computation
Regulation of Agriculture – Food Products, Slaughterhouse Line Speeds and CAFOS
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
The FLSA and Ag’s Exemption From Paying Overtime Wages
The “Dormant” Commerce Clause and Agriculture
Trouble with ARPA
https://lawprofessors.typepad.com/agriculturallaw/2021/06/trouble-with-arpa.html
No Expansion of Public Trust Doctrine in Iowa – Big Implications for Agriculture
Key “Takings Decision from SCOTUS Involving Ag Businesses
Reimbursement Claims in Estates; Drainage District Assessments
Mailboxes and Farm Equipment
https://lawprofessors.typepad.com/agriculturallaw/2021/07/mailboxes-and-farm-equipment.html
Montana Conference and Ag Law Summit (Nebraska)
California’s Regulation of U.S. Agriculture
Checkoffs and Government Speech – The Merry-Go-Round Revolves Again
Is There a Constitutional Way To Protect Animal Ag Facilities
Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2021/10/caselaw-update.html
Recent Court Decisions of Interest
https://lawprofessors.typepad.com/agriculturallaw/2021/12/recent-court-decisions-of-interest.html
Livestock Indemnity Payments – What Are They? What Are the Tax Reporting Options?
SECURED TRANSACTIONS
Continuing Education Events and Summer Conferences
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
Cross-Collateralization Clauses – Tough Lessons For Lenders
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
The “EIDL Trap” For Farm Borrowers
https://lawprofessors.typepad.com/agriculturallaw/2021/07/the-eidl-trap-for-farm-borrowers.html
The Potential Peril Associated With Deferred Payment Contracts
WATER LAW
Continuing Education Events and Summer Conferences
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Three
Agricultural Law Online!
https://lawprofessors.typepad.com/agriculturallaw/2021/01/agricultural-law-online.html
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Montana Conference and Ag Law Summit (Nebraska)
May 22, 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, April 14, 2022
When Is an Agricultural Activity a Nuisance?
Overview
Land use conflicts are often present in urban, residential and commercial areas. However, they also occur in rural areas. Large-scale livestock agricultural operations, wind “farms” and similar rural land uses present many of the same issues.
How does the law handle rural land-use conflicts? How can these conflict situations with adjoining landowners best be minimized or avoided?
Land use conflicts in rural areas, ag nuisances and pointers for minimizes conflict among landowners – this is the discussion of today’s post.
What’s An Ag Nuisance?
A nuisance is an invasion of an individual's interest in the use and enjoyment of land rather than an interference with the exclusive possession or ownership of the land. See, e.g., Peters, et al. v. Contigroup, et al., 292 S.W.3d 380 (Mo. Ct. App. 2009); Jones v. Hart, 2021 Vt. 61, 261 A.3d 1126 (2021). Nuisance law prohibits land uses that unreasonably and substantially interfere with another individual's quiet use and enjoyment. The doctrine is based on two interrelated concepts: (1) landowners have the right to use and enjoy property free of unreasonable interferences by others; and (2) landowners must use property so as not to injure adjacent owners. In a nuisance action, proof of general damages (diminished quality of life) may be sufficient evidence to support a monetary award. See, e.g., Stephens, et al. v. Pillen, 681 N.W.2d 59, 12 Neb. App. 600 (2004).
The two primary issues at stake in any agricultural nuisance dispute are whether the use alleged to be a nuisance is reasonable for the area and whether the use alleged to be a nuisance substantially interferes with the use and enjoyment of neighboring land. See, e.g., Bower v. Hog Builders, Inc., 461 S.W.2d 784 (Mo. 1970).
Are Nuisance and Negligence the Same?
“Nuisance” and “negligence” are not the same thing. Operating a farming or ranching activity properly and having all requisite permits may still constitute a nuisance if a court or jury determines the activity is “unreasonable” and causes a “substantial interference” with another person's use and enjoyment of property. Whether a complained of activity, such as spreading manure, results in a “substantial” and “unreasonable” interference with another's property will depend on the facts of each case and the legal rules used in the particular jurisdiction. See, e.g., Penland v. Redwood Sanitary Sewer Service District, 156 Or. App. 311, 965 P.2d 433 (1998).
Because each claim of nuisance depends on the fact of the case, there are no easy rules to determine when an activity will be considered a nuisance. In general, a court faced with a particular nuisance claim will consider several factors. See, e.g., Hernandez v. Jefferson County Sheriff’s Office, No. 3:19-cv-1404-JR, 2020 U.S. Dist. LEXIS 109784 (D. Or. Jun. 23, 2020). Primary among these factors is whether the use complained of is a reasonable use that is common to the area or whether it is not suitable. See, e.g., May v. Brueshaber, 265 Ga. 889, 466 S.E.2d 196 (1995). Also important is whether the use complained of is a minor inconvenience which happens very infrequently or whether it is a regular and continuous activity. The nature of the property use being disturbed is also an important consideration. If the interference has a significant impact on the complaining party's use of their own property, such as the prevention of living in the complaining party's home, a nuisance will likely be found. Similarly, if the complained of use is preventing another landowner's use of their property that is a vital part of the local economy, the court will balance the economics of the situation and most likely conclude that the complained of use constituted a nuisance. An additional important factor, but not conclusive in and of itself of the issue is whether the complained of use was in existence prior to the complaining party's use of their property which is now claimed to be interfered with. A related concern, if the activity generating the alleged nuisance was in existence prior to the complaining party moving into the vicinity, is whether the nuisance activity was obvious at the time the complaining party moved in.
Note: Many courts also attempt to balance the economic value to society of the uses in question. If the complained of use adds jobs and income to the local economy, the value to society of continuing the alleged nuisance may outweigh the negative impact it causes.
If A Nuisance Exists, What Then?
If a court determines that a nuisance (just one that is anticipated to occur in the future) exists, it has much discretion in establishing an appropriate remedy for a nuisance. The most common remedy is for the court to stop (enjoin) the nuisance activity. See, e.g., Moody, et al. v. Wiza, 2007 Ohio 5356 (Ohio Ct. App. 2007); Simpson, et.al. v. Kollasch, et. al., 749 N.W.2d 671 (Iowa 2008); Walker, et al. v. Kingfisher Wind, LLC, No. CIV-14-D, 2016 U.S. Dist. LEXIS 141710 (W.D. Okla. Oct. 13, 2016). However, most courts try to fashion a remedy to fit the particular situation. See, e.g., Valasek v. Baer, 401 N.W.2d 33 (Iowa 1987); Spur Industries, Inc. v. Del E. Webb Development Co., 108 Ariz. 178, 494 P.2d 700 (1972).
Aesthetic Injury Only?
What if the only complained-of problem is aesthetic? Is that enough to make out a claim for nuisance? The issue has come up in a court case from Vermont involving solar panels. In Myrick v. Peck Electric Co., 204 Vt. 128, 164 A.3d 658 (2017), the plaintiff was a landowner that sued the defendant, two solar energy companies, when the plaintiff’s neighbors leased property to the defendants for the purpose of constructing commercial solar arrays (panels). The plaintiff claimed that the solar arrays constituted a private nuisance by negatively affecting the surrounding area’s rural aesthetic which also caused local property values to decline. The trial court granted summary judgment to the defendants. On appeal, the Vermont Supreme Court affirmed. The Court noted that Vermont law has held, dating back to the late 1800s, that private nuisance actions based on aesthetic disapproval alone are barred. The Court rejected the plaintiff’s argument that the historic Vermont position should change based on changed society. The Court also rejected the notion that Vermont private nuisance law was broad enough to apply to aesthetic harm, stating that, “An unattractive sight, without more, is not a substantial interference as a matter of law because the mere appearance of the property of another does not affect a citizen’s ability to use and enjoy his or her neighboring land.” Emotional distress is not an interference with the use or enjoyment of land, the court stated. But, if the solar panels casted reflections, for example, that could be an interference with the use and enjoyment of one’s property. Aesthetic values, the court noted, are inherently subjective and the court wasn’t going to set an aesthetic standard. The Court also noted that the plaintiffs had conceded at oral argument that they were not pursuing a claim that diminution in value, by itself, was sufficient to constitute a nuisance. However, the Court went on to state that a nuisance claim based solely on loss in value invites speculation that the Court would not engage in.
The Vermont court’s decision follows the majority rule among jurisdictions in the United States. There are some exceptions. For example, a few courts have held that proof of general damages (diminished quality of life) may be sufficient evidence to support a monetary award. See, e.g., Stephens, et al. v. Pillen, 12 Neb. App. 600 (2004). But, in general, aesthetic injury, by itself, is not enough to make a claim for nuisance. However, if it is coupled with claims of substantial interference with use and enjoyment of property, a nuisance claim might successfully be made. Renewable energy generation (solar and wind) tends to require a large amount of land for its operation, but unsightliness, by itself, is likely not enough to constitute a nuisance.
Landlord Liability for Tenant’s Nuisance
Generally, a landlord is not responsible for the acts of a tenant. But there are exceptions to that general rule. One of those exceptions applies when the landlord knows that the tenant is harming the property rights of adjacent landowners and does nothing to modify the tenant’s conduct or terminate the lease. In that situation, the landlord can be held liable along with the tenant. A good example of this can be found in Tetzlaff v. Camp, et al., 715 N.W.2d 256 (Iowa 2006). In the case, a farm tenant operated a hog facility for the landlord. The plaintiff lived adjacent to land on which the tenant surface spread hog manure within 90-feet of the plaintiff’s home. The plaintiff complained to the landlord over approximately a four-year period. The complaints fell on deaf ears. The plaintiff sued and the Iowa Supreme Court held that the landlord was responsible for the tenant’s creation of a nuisance because the landlord knew of the tenant’s conduct, its impact on the plaintiff and did nothing about it.
Potential Defenses
Priority of location. If a farmer gets sued for the alleged creation of a nuisance, how does the farmer mount a defense? While there are no common law defenses that an agricultural operation may use to shield itself from liability arising from a nuisance action, as noted above, the courts do consider a variety of factors to determine if the conduct of a particular farm or ranch operation is a nuisance. Of primary importance are priority of location and reasonableness of the operation. Together, these two factors have led courts to develop a “coming to the nuisance” defense. This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.
Right-to-farm laws. Every state has enacted a right-to-farm law that is designed to protect existing agricultural operations by giving farmers and ranchers who meet the legal requirements a defense in nuisance suits. The basic thrust of a particular state's right-to-farm law is that it is unfair for a person to move to an agricultural area knowing the conditions which might be present and then ask a court to declare a neighboring farm a nuisance. Thus, the basic purpose of a right-to-farm law is to create a legal and economic climate in which farm operations can be continued. Right-to-farm laws can be an important protection for agricultural operations, but, to be protected, an agricultural operation must satisfy the law's requirements. See, e.g., Alpental Community Club, Inc., v. Seattle Gymnastics Society, 86 P.3d 784 (Wash. Ct. App. 2004); Hood River County v. Mazzara, 89 P.3d 1195 (Or. Ct. App. 2004).
The most common type of right-to-farm law is nuisance related. This type of statute requires that an agricultural operation will be protected only if it has been in existence for a specified period of time (usually at least one year) before the change in the surrounding area that gives rise to a nuisance claim. See, e.g., Vicwood Meridian Partnership, et al. v. Skagit Sand and Gravel, 98 P. 3d 1277 (Wash. Ct. App. 2004). These types of statute essentially codify the “coming to the nuisance defense,” but do not protect agricultural operations which were a nuisance from the beginning or which are negligently or improperly run. For example, if any state or federal permits are required to properly conduct the agricultural operation, they must be acquired as a prerequisite for protection under the statute.
Another type of right-to-farm statute may be structured to bar local and county governments from enacting regulations or ordinances that impose restrictions on normal agricultural practices. Still another type exempts (at least in part) agricultural uses from county zoning ordinances. The major legal issue involving this type of statute is whether a particular activity is an agricultural use or a commercial activity. In general, “agricultural use” is defined broadly. See, e.g., Knox County v. The Highlands, L.L.C., 302 Ill. App. 3d 342, 705 N.E.2d 128 (1998), aff’d, 723 N.E.2d 256 (Ill. 1999).
Note: Sometimes noise may not appear to be connected with the production of agricultural products, but it actually might be. For instance, a howling dog in the night might normally be considered to be a nuisance because it interferes with a neighbor’s right to use and enjoy their property. But the noise of the barking dog might be because the dog is guarding livestock and, thus, the dog is engaged in an agricultural activity that is protected by a right-to-farm statute. See, e.g., Hood River City v. Mazzara, 193 Ore. App. 272, 89 P.3d 1195 (Or. Ct. App. 2004).
An important point is that while right-to-farm laws try to assure the continuation of farming operations, they do not protect subsequent changes in a farming operation that constitute a nuisance after local development occurs nearby. See, e.g., Davis, et al. v. Taylor, et al., 132 P.3d 783 (Wash. Ct. App. 2006); Flansburgh v. Coffey, 370 N.W.2d 127 (Neb. 1985). While a right-to-farm law may not bar an action for a change in operations when a nuisance is present, if a nuisance cannot be established a right-to-farm law can operate to bar an action when the agricultural activity on land changes in nature. See, e.g., Dalzell, et al. v. Country View Family Farms, LLC, No. 1:09-cv-1567-WTL-MJD, 2012 U.S. Dist. LEXIS 130773 (S.D. Ind. Sept. 13, 2012), aff’d., 517 Fed. Appx. 578 (7th Cir. 2013). See also Parker v. Obert’s Legacy Dairy, 988 N.E.2d 319 (Ind. Ct. App. 2013).
Conclusion
Land use conflicts in rural areas are not uncommon and have become more prevalent in recent decades as the structure of agriculture had changed and new types of rural land uses have appeared. To minimize conflict with neighbors and stay out of court defending a nuisance case, attention should be paid to certain key points. Location of any facility that could give rise to a nuisance claim is key. Related to location, particularly with respect to odor-related issues is wind direction. For confinement livestock facilities, proper ventilation is key as is manure storage and field injection practices. Of course, the overall appearance of farm structures is important - perhaps almost as important as are manure disposal practices.
Keeping these points in mind just might keep the farming operation out of court.
April 14, 2022 in Civil Liabilities | Permalink | Comments (0)
Monday, March 21, 2022
Animal Ag Facilities and the Constitution
Overview
In response to attempts to shut down animal confinement operations by activist groups, legislatures in several states have enacted laws designed to protect these businesses by limiting access. A common approach is for the law to criminalize the use of deception to access a confined livestock facility or meatpacking plant with the intent to cause physical harm, economic harm or some other type of injury to the business. But the laws have generally been struck down on free speech and equal protection grounds. Is there a way for states to provide legal protection to confinement livestock facilities? What can these facilities do to protect themselves?
Laws designed to protect confined animal livestock facilities from those intended to do them harm – it’s the topic of today’s post.
General Statutory Construct
The basic idea of state legislatures that have attempted to provide a level of protection to livestock facilities is to bar access to an animal production facility under false pretenses. At their core, the laws attempt to prohibit a person having the intent to harm a livestock production facility from gaining access to the facility (such as via employment) to then commit illegal acts on the premises. See, e.g., Iowa Code §717A.3A. Laws that bar lying and trespass coupled with the intent to do physical harm to an animal production facility should not be constitutionally deficient. Laws that go beyond those confines may be.
The Iowa provisions. Iowa legislation is a common example of how states have attempted to address the issue. The Iowa legislature has made two attempts at crafting a state law that would withstand a constitutional challenge. The initial version criminalized “agricultural production facility fraud” if a person willfully obtained access to such a facility by false pretenses (the “access” provision) or made a false statement or representation as part of an application or agreement to be employed at the facility (the “employment” provision). The law also required the person to know that the statement was false when made and that it was made with an intent to commit a knowingly unauthorized act. Iowa Code §717A.3A. This initial statutory version was challenged and, as discussed below, the employment provision was deemed unconstitutional.
The Iowa legislature then modified the law with a second version that described an agricultural production facility trespass as occurring when a person uses deception “on a matter that would reasonably result in a denial of access to an agricultural production facility that is not open to the public, and, through such deception, gains access to [the facility], with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “access” provision]. The revised law also criminalizes the use of deception “on a matter that would reasonably result in a denial of an opportunity to be employed at [a facility] that is not open to the public, and, through such deception, is so employed, with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “employment” provision].
In other words, the Iowa provisions criminalizes the use of lies to either gain access or employment at an ag production facility where the use is coupled with the intent to do harm. Sounds quite reasonable, doesn’t it? But the courts (a place where the telling of a lie can come with severe penalties) have generally come to a different conclusion.
Recent Court Opinions
North Carolina. In 2017, a challenge to the North Carolina statutory provision was dismissed for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017). The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act. They claimed that the law unconstitutionally stifled their ability to investigate North Carolina employers for illegal or unethical conduct and restricted the flow of information those investigations provide. As noted, the court dismissed the case for lack of standing. On appeal, however, the appellate court reversed. PETA, Inc. v. Stein, 737 Fed. Appx. 122 (4th Cir. 2018). The appellate court determined that the plaintiffs had standing to challenge the law through its “chilling effect” on their First Amendment rights to investigate and publicize actions on private property. They also alleged a reasonable fear that the law would be enforced against them.
On the merits, the trial court then held that the challenged provisions of the law were unconstitutional under the First Amendment as a violation of the plaintiffs’ free speech rights. People for the Ethical Treatment of Animals, Inc. v. Stein, 466 F. Supp. 3d 547 (M.D. N.C. 2020).
Utah. The Utah law was also deemed unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017). At issue was Utah Code §76-6-112 which criminalizes the entering of a private agricultural livestock facility under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist.” For those reasons, the court determined that the Act was unconstitutional.
A Wyoming law experienced a similar fate. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016). In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" included numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection of resource data.
Note: The appellate court remanded the case to the trial court for a determination of the appropriate level of scrutiny and whether the statutes survived review. Ultimately, the trial court granted the plaintiffs’ motion for summary judgment, finding that the statutes were content based and, as such failed to withstand constitutional strict scrutiny review on the basis that the laws were not narrowly tailored. Western Watersheds Project v. Michael, 353 F. Supp. 3d 1176 (D. Wyo. 2018).
Ninth Circuit. In early 2018, the U.S. Circuit Court of Appeals for the Ninth Circuit issued a detailed opinion involving the Idaho statutory provision. Animal Legal Defense Fund v. Wasden, 878 F.3d 1184 (9th Cir. 2018). The Ninth Circuit’s opinion provides a roadmap for state lawmakers to follow to provide at least a minimal level of protection to animal production facilities from those that would intend to do them economic harm. According to the Ninth Circuit, state legislation can bar entry to a facility by force, threat or trespass. Likewise, the acquisition of economic data by misrepresentation can be prohibited. Similarly, criminalizing the obtaining of employment by false pretenses coupled with the intent to cause harm to the animal production facility is not constitutionally deficient. However, provisions that criminalize audiovisual recordings are suspect.
Eighth Circuit. In 2021, the U.S. Court of Appeals for the Eighth Circuit construed the initial version of the Iowa law and upheld the portion of it providing for criminal penalties for gaining access to a covered facility by false pretenses. Animal Legal Defense Fund v. Reynolds, 8 F.4th 781 (8th Cir. 2021). This is the first time that any federal circuit court of appeals has upheld a provision that makes illegal the gaining of access to a covered facility by lying.
Conversely, the court held that the employment provision of the law (knowingly making a false statement to obtain employment) violated the First Amendment because the law was not limited to false claims that were made to gain an offer of employment. Instead, the provision provided for prosecution of persons who made false statements that were incapable of influencing an offer of employment. A prohibition on immaterial falsehoods was not necessary to protect the State’s interest – such as false exaggerations made to impress the job interviewer. The court determined that barring only false statements that were material to a hiring decision was a less restrictive means to achieve the State’s interest.
Note. The day before the Eighth Circuit issued its opinion concerning the Iowa law, it determined that plaintiffs challenging a comparable Arkansas law had standing the bring the case. Animal Legal Defense Fund v. Vaught, 8 F.4th 714 (8th Cir. 2021). The court later denied a petition for rehearing. Animal Legal Defense Fund v. Vaught, No. 20-1538, 2021 U.S. App. LEXIS 27712 (8th Cir. Sept. 15, 2021).
In late 2019, the plaintiffs in the Iowa case file suit to enjoin the second version of the Iowa law – Iowa Code §717A.3B. The trial court agreed and preliminary enjoined the revised law. The plaintiffs then filed a motion for summary judgment in early 2020 and the state filed a cross motion for summary judgment, and the case was continued while the appellate court was considering the case involving the initial version of the Iowa law. As noted above, the appellate court ultimately upheld the access provision but not the employment provision. The trial court, in the current case upheld the plaintiffs’ motion for summary judgment, finding that the revised statutory language had been slightly modified, but was substantially similar to the initial version. As such, the trial court determined that the revised statute discriminated based on content and viewpoint and was unconstitutional under a strict scrutiny analysis. Animal Legal Defense Fund v. Reynolds, No. 4:19-cv-00124-SMR-HCA, 2022 U.S. Dist. LEXIS 48142 (S.D. Iowa Mar. 14, 2022).
Tenth Circuit. In Animal Legal Defense Fund, et al. v. Kelly, 9 F.4th 1219 (10th Cir. 2021), pet. for cert. filed, (U.S. Sup. Ct. Nov. 17, 2021), the court construed the Kansas provision that makes it a crime to take pictures or record videos at a covered facility “without the effective consent of the owner and with the intent to damage the enterprise.” The plaintiffs claimed that the law violated their First Amendment free speech rights. The State claimed that what was being barred was conduct rather than speech and that, therefore, the First Amendment didn’t apply. But, the court tied conduct together with speech to find a constitutional violation – it was necessary to lie to gain access to a covered facility and consent to film activities. As such, the law regulated protected speech (lying with intent to cause harm to a business) and was unconstitutional. The court determined that the State failed to prove that the law narrowly tailored to a compelling state interest in suppressing the “speech” involved. The dissent pointed out (correctly and consistently with the Eighth Circuit) that “lies uttered to obtain consent to enter the premises of an agricultural facility are not protected speech.” The First Amendment does not protect a fraudulently obtained consent to enter someone else’s property.
A Different Approach?
The appellate courts generally holding that the right to free speech protects false factual statements that inflict real harm and serve no legitimate interest runs contrary to an established line of U.S. Supreme Court precedent, at least until the Court’s decision in United States v. Alvarez, 567 U.S. 709 (2012). See, e.g., Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983); Brown v. Hartlage, 456 U.S. 45 (1982); Herbert v. Lando, 441 U.S. 153 (1979); Garrison v. Louisiana, 379 U.S. 64 (1964). The current split between the Eighth, Ninth and Tenth Circuits on the constitutionality of the Iowa Idaho and Kansas laws with respect to the issue of gaining access to a covered facility by lying could warrant a Supreme Court review.
Indiana trespass law. Short of a Supreme Court review of a state statute such as that of Iowa, Idaho or Kansas, is there another approach that a state might take to provide protection for agricultural livestock facilities? The state of Indiana’s approach might be the answer. In 2014, the Indiana legislature passed, and the Governor signed into law the “Indiana Trespass Law.” Ind. Code 35-43-2-2. Under the statute, “trespass” is defined as being on a property after being denied entry by the property owner, court order or by a posted sign (or purple paint). If the trespass involves a dwelling (including an ag operation), the landowner need not deny entry for a trespass to be established. The law also sets various thresholds for criminal violations.
The Indiana law appears to base property entry on the legal property interest of that of a license. A license is a term that covers a wide range of permissive land uses which, unless permitted, would be trespasses. For example, a hunter who is on the premises with permission is a licensee. The hunter has a license for the limited purpose of hunting only. If the hunter were to videotape any activity on the premises, that would constitute a trespass as exceeding the scope of the license. An unlawful entry. This would be the same result for a farm employee. Video recording would be outside the scope of employment. By focusing on the property interest of a license and that of a trespass for unauthorized entry, a claim of a possible free speech violation is eliminated.
Hiring Practices
In light of activists that wish to harm animal agriculture, ag animal facilities should utilize common sense steps to minimize potential problems. Of course, not mistreating animals should always be the standard. Proper hiring practices are also very important. A well drafted employment agreement should be used for workers hired to work in an ag animal facility to help screen potential hires. The agreement should specify in detail the job requirements and what is not permitted to occur on the premises and inside buildings. The agreement should give the employer the right to search every employee for devices that could be used to record activities on the farm and in farm buildings. Also, employee training should be provided and documented. Also, it’s critical that employee conduct be closely monitored to ensure that employees are acting within the scope of their employment and that animals are being treated appropriately.
Conclusion
It’s unfortunate that groups exist dedicated to damage and/or eliminate certain aspects of animal agriculture, and that they will use lies and deception to become employed and gain access. But, until state law is drafted in a way that will be found constitutional, livestock operations must adopt hiring and business practices that will minimize potential harm.
March 21, 2022 in Civil Liabilities, Criminal Liabilities, Real Property, Regulatory Law | Permalink | Comments (0)
Friday, March 18, 2022
Agritourism
Overview
Agritourism activities have expanded in recent years as an additional income stream for some farming and ranching operations and rural landowners in general, generating about $1 billion dollars nationwide. But, engaging in an agritourism activity (or activities) on the premises means that members of the public will be invited to be present upon paying a fee. That raises the prospect of injury and potential liability.
The liability issue is a major concern for landowners. In the U.S., about 80 percent of respondents to a survey listed concerns about liability as a limiting factor of engaging in agritourism activities. Chase, et al., Agritourism and On-Farm Direct Sales Survey: Results for Vermont, University of Vermont extension (2021). Also, about that same percentage were worried about the cost and availability of insurance. Id. To address landowner liability and other concerns, and incentivize agritourism activities, many states have enacted agritourism statutes. What does such legislation do? What liability protection is provided?
Agritourism laws – it’s the topic of today’s post.
In General
Agritourism generally includes numerous activities on a rural property associated with either entertainment, recreational, educational and even commercial activities. The USDA defines agritourism (and recreational) activities generally as “hunting, fishing, farm or wine tours, hayrides, etc.” USDA National Agricultural Statistics Service (NASS), 2017 Census of Agriculture, Explanation and Census of Agricultural Report Form, B-24 Appendix B (2019)). Also commonly treated as agritourism are famers markets, roadside farm stands and “U-Pick” operations, but a permit may be required. See e.g., Utah Code Ann. §26-15B-105. It is also possible that the definition of “agritourism” could be statutorily defined to include certain types of overnight accommodations, hayrides, corn mazes, riding on tractors and other farm equipment, riding on horses, playing around or climbing on hay bales, and weddings. See, e.g., Va. Code Ann. §3-2-6400. The definition may also include camping and tours of the property. But some states exclude some of these activities from the definition of agritourism. The key is to always check the specifics of state law.
Federal Law
In early 2022, H.R. 6408 was introduced into the U.S. House of Representatives. The bill would create a Department of Agritourism. The bill defines “agritourism” to include education, outdoor recreation, entertainment, direct sales. the provision of certain types of accommodations, and dining on a farm. The bill was introduced into the House Agriculture Committee on January 13, 2022, where it presently remains.
State Laws
Liability. In recent years, numerous states have enacted agritourism legislation designed to limit landowner liability to those persons engaging in an “agritourism activity.” A majority of states now have enacted such laws. Typically, the legislation protects the landowner (commonly defined as a “person who is engaged in the business of farming or ranching and [who] provides one or more agritourism activities, whether or not for compensation”) from liability for injuries to participants or spectators associated with the inherent risks of a covered activity. See, e.g., Tenn. Code Ann. §43-39-103 (requiring posting of warning signs informing of no liability for injury or death arising from inherent risks). Without such liability protection a landowner is generally held liable for an injury to an invited guest under a high standard of care that requires the landowner to make sure the premises is safe, exercise reasonable care under the circumstances, and warn of hidden dangers.
The statutes tend to be written very broadly and have various standards of care that might apply to a landowner. For instance, legislation introduced into the Illinois legislature in early 2022 would grant liability protection to landowners for claims arising from participation in broadly defined agritourism activities. IL H.B. 5487. If the “agritourism operator” posts the statutorily required warning notice, the operator is not liable for the injury or death of a participant resulting from the inherent risks of participating in an agritourism activity. The operator is not protected, however, if the operator acts with willful or wanton disregard for the participant’s safety and the operator’s conduct is causally related to the participant’s injury or death. The same is true if the operator fails to disclose known inherent risks.
Note: Many states have statutory provisions similar to what Illinois is considering. For instance, with many state statutes, the landowner must post warning signs to receive the protection of the statute, and in some states the landowner must register their property with the state. See, e.g., 3 Pa. Stat. §2604.
This modification in the standard of care under an agritourism statute is common among the states with an agritourism statute. See, e.g., N.C. Gen. Stat. §99E-1(a); 4 Tex. Admin. Code §75A.002(a)(1)-(2). Under these state statutes, liability is limited in situations where the landowner acted wantonly or with willful negligence, and liability is excluded for injury arising from the inherent risks associated with an active farming operation. In many of the states that have agritourism statutes, the posting of specific signage is required to get the liability protection and, of course, the person claiming the protection of the statute must meet the definition of a covered person and the activity that gave rise to the liability claim must be a statutorily covered activity. Further, in some states (such as Iowa), liability release forms, at least with respect to minors, may be deemed to violate “public policy” (as decided by judges rather than the public).
Exclusions. Some activities may be excluded from the definition of “agritourism” under a state’s statute. Common activities that might be excluded are roadside fruit and vegetable stands; operations that are solely for the purpose of selling or merchandising food; marijuana-related activities (even if permissible under state law); rodeos; sky and water diving; paintball; various types of bicycling; activities in structures primarily intended for use by the general public; and various types of animal therapy activities. Again, the point is that each state statute is unique to that particular state and before starting an agritourism activity, the landowner/operator must be familiar with the applicable rules.
Compensation. There are also differences among state agritourism statutes as to whether charging participants a fee changes the landowner/operator’s duty of care. In most of the states with an agritourism statute, the liability protection of the statute applies if the landowner charges a fee. That is the case in AR, CO, DE, FL, KS, KY, ME, MN, MO, NC, ND, OK, OR, SD, TN, TX, VA and WI. But, in Alaska, no heightened liability protection is provided by the agritourism statute if a fee must be paid to access the land at issue to engage in an agritourism activity. Alaska Stat. §09.65.202(c)(1).
Other states with an agritourism statute do not mention the issue of compensation and whether charging a fee changes the liability protection of the statute.
Financial incentives. Some state laws related to agritourism relate to financial incentives via tax credits or cost-sharing, promotion, exemption from permits, protecting the ag real property tax classification of the property involved or providing special classification for structures used for agritourism activities. See, e.g., Md. Code Pub. Safety §12-508 (exempting buildings used for agritourism from performance standards and building permit requirements); Neb. Rev. Stat. §75-303(3)(exempting motor carriers from certain requirements if engaged in transportation related to agritourism); S.C. Code Ann. §6-9-67 (classifying certain structures without a commercial kitchen used in agritourism activity as ag and removes sprinkler system requirement).
Some states address agritourism activities either via laws governing agriculture in general or via land-use/zoning laws. This is particular true for activities that are “events.” For example, Pennsylvania law doesn’t provide any liability protection for injuries occurring during weddings or concerts on the premises. 3 Pa. Stat. §§2603(c)(2)-(3) et seq.
On the tax classification issue, Ohio law includes agritourism in the definition of “land exclusively used devoted to agriculture” for tax assessment purposes. Ohio Rev. Code. §5713.30(A)(4). Thus, the definition of “agritourism” is critical in receiving ag classification. On that issue, the Ohio Supreme Court, in Columbia Township Board of Zoning v. Otis, 663 N.E.2d 377, 104 Ohio App. 3d 756 (Ohio 1995), held that haunted hay rides on farm property did not constitute the use of land for agricultural purposes because the addition of a Halloween theme with shrieks and flashing lights was completely inconsistent with traditional agricultural activity. Similarly, in Shore v. Maple Lane Farms, LLC, 411 S.W.3d 405 (Tenn. Sup. Ct. 2013), the Tennessee Supreme Court reversed a determination by the court of appeals that music concerts on a farm were within the definition of farm activities within the scope of the agritourism statute and were exempt from a county zoning provision. The Tennessee Supreme Court said the activity was not “agriculture” as defined by the statute. Likewise, in Forster v. Town of Henniker, 167 N.H. 745 (2015), the court held that the use of a Christmas tree farm for weddings did not meet the definition of agritourism and, as a result, was not “agriculture” for zoning purposes.
Note: On the tax classification/zoning issue, a state agritourism statute may define an agritourism activity involving an event (such as a wedding, concert or festival, etc.) by reference to local zoning rules and ordinances. Such local rules and ordinances may set size limitations, require certain permits, set operational standards and address issues involving sound and light, and restrict the number of guests/participants based on local conditions.
Insurance. Any landowner conducting an agritourism activity on their property should make sure insurance coverage is adequate. It is not likely that a comprehensive farm/ranch liability policy will cover any claims arising from the activity. That’s because an agritourism activity will likely be classified as a non-farm business pursuit of the insured that is excluded from policy coverage. Thus, a separate rider (or policy) may be necessary to provide adequate insurance coverage.
Conclusion
Agritourism activities on a farm or ranch or other rural land can provide an additional income stream for the landowner. For farmers and ranchers, that may be particularly important if current ag markets in Russia, China or Ukraine become lost in the long-term.
March 18, 2022 in Civil Liabilities | Permalink | Comments (0)
Tuesday, January 4, 2022
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Overview
As I pointed out in Sunday’s article, agricultural law and agricultural tax law intersect with everyday life of farmers and ranchers in many ways. Some of those areas of intersection are good, but some are quite troubling. In any event, it points to the need for being educated and having good legal and tax counsel that is well-trained in the special rules that apply to agriculture.
This is the second installment in my list of the “Top Ten” agricultural law and tax developments of 2021. The list is comprised of what are, in my view, the most important developments in agricultural law (which includes taxation that impacts farmers and ranchers) to the sector as a whole. The developments primarily are focused on the impact to production agriculture, but the issues involved will also have effects that spillover to rural landowners and agribusinesses as well as consumers of agricultural products.
The Eighth and Seventh most important agricultural law and tax developments of 2021 – it’s the topic of today’s post.
8. Ag Nuisance Litigation in North Carolina. In recent years, North Carolina has been the focus of much ag nuisance litigation, particularly targeted at large-scale hog confinement operations. Legal developments flowing from the various cases has influenced the North Carolina legislature as well as legislatures in other states (such as Florida and Indiana) to modify their Right-To-Farm (RTF) laws in an attempt to provide greater legal protection to agricultural operations. In 2021, there were further developments in North Carolina involving nuisance and that state’s RTF law.
The North Carolina RTF law was originally enacted in 1979 with the state policy goal to: "[R]educe the loss to the State of its agricultural and forestry resources by limiting the circumstances under which an agricultural or forestry operation may be deemed a nuisance." After many nuisance suits were filed against confinement hog operations, the legislature amended the RTF in 2013. The amendment specified that an ag operation that has been in business for at least a year and has not fundamentally changed is protected from a nuisance action as a result of changed conditions surrounding it if the ag operation was not a nuisance at the time it began. The plaintiffs refiled their suits in 2014 in federal district court based on the amended law. The federal court held that the RTF law did not apply to shield hog producers and five juries rendered verdicts for the plaintiffs. The legislature again amended the RTF law in 2017 and 2018 to expand its protection for agricultural operations.
There were two additional court opinions in 2021 involving the North Carolina RTF law. In Barden v. Murphy-Brown, LLC, No. 7:20-CV-85-BR, 2021 U.S. Dist. LEXIS 47809 (E.D. N.C. Mar. 15, 2021), the plaintiff sued the defendant in 2020 for trespass, negligence, civil conspiracy and unjust enrichment arising from odor, dust, feces, urine and flies from a neighboring hog facility that housed 20,000-head of the defendant’s hogs. The plaintiff sought compensatory and punitive damages. The defendant sought to dismiss the complaint for failure to join to the lawsuit the farmer that operated the hog facility via a contact with the defendant as an indispensable party. The court disagreed, as the farmer’s conduct was likely irrelevant to the outcome of the litigation and any impact that an adverse judgment against the defendant might have on the farmer’s interests at the farm was speculative. The defendant also sought dismissal on the basis that the plaintiff’s complaint failed to state a claim for relief that was other than speculative. The defendant cited the North Carolina RTF law as barring all of the plaintiff’s claims.
The federal trial court disagreed with the defendant, noting that conditions constituting a nuisance can also constitute a trespass (and other causes of action). Thus, the plaintiff’s complaint was not restricted to allegations of a nuisance cause of action which the RTF law would bar. The court noted that the RTF law was different from other state RTF laws that covered non-nuisance tort claims related to farming operations along with nuisance claims. The RTF law only covered nuisance-related claims and had no application to non-nuisance claims. As to whether the plaintiff adequately alleged the non-nuisance claims, the court concluded that the plaintiff sufficiently alleged, at a minimum, a claim for unintentional trespass by not consenting to dust, urine and fecal matter from entering its property. On the plaintiff’s negligence claim, the court determined that it was reasonably foreseeable that if the defendant did not act reasonably in managing the facility that dust and animal waste would be present on the plaintiff’s property. As such, the defendant owed the plaintiff a duty and there was a causal link with any potential breach of that duty. Thus, the plaintiff properly stated a claim for negligence. The plaintiff also alleged that the defendant conspired with its corporate parent to mislead the public about the science of hog manure removal and various constitutional violations. The court rejected this claim because any conspiracy was between the defendant and its corporate parent and not with any independent party. The plaintiff also claimed that the defendant unjustly enriched itself by using the plaintiff’s property for a de facto easement without paying for it. The court rejected the claim because the plaintiff had conferred no benefit on the plaintiff which gave rise to any legal or equitable obligation on the defendant’s part to account for the benefit received. However, the court refused to strike the plaintiff’s allegations relating to the defendant’s Chinese ownership, influence and exploitation as well as the defendant’s financial resources. The court determined that such allegations had a bearing on the defendant’s motivation, extent of harm and ability to implement alternative technology.
A second court opinion involving the North Carolina RTF law was issued in late 2021. In Rural Empowerment Association for Community Help v. State, No. COA21-175, 2021 N.C. App. LEXIS 733 (N.C. Ct. App. Dec. 21, 2021), the plaintiffs filed suit in 2019 challenging the constitutionality of the RTF law. The plaintiffs sued in 2019 challenging the constitutionality of the RTF law on its face because they claimed the law exceeded the scope of the state’s police power. The defendants moved to dismiss the case and the trial court granted the defendant's motion to dismiss and denied the plaintiffs’ motion for summary judgment. On appeal, the appellate court affirmed. The state appellate court agreed with the trial court that limiting the potential nuisance liability from ag, forestry, and related operations furthered the state’s goal of protecting ag activities and encouraging the availability and continued production of agricultural products. The appellate court also determined that the RTF law amendments were a valid exercise of legislative and state police powers and did not violate the state Constitution’s Law of the Land Clause or the Due Process Clause. The appellate court also determined that the amendments were not a special or private law, and didn’t deprive any prospective plaintiff of the right to a jury trial.
Note: It is anticipated that the state appellate court opinion, if upheld on any appeal, will provide further guidance to other states and RTF laws.
7. Federal Court Determines Whether Withheld Taxes and Other Pre-Paid Taxes Can Be Deprioritized in Chapter 12 Bankruptcy. As originally enacted, Chapter 12 did not create a separate tax entity for Chapter 12 bankruptcy estates for purposes of federal income taxation. That shortcoming precludes debtor avoidance of potential income tax liability on disposition of assets as may be possible for individuals who file Chapter 7 or 11 bankruptcy. But, an amendment to Chapter 12 in 2005 made an important change. As modified, tax debt associated with the sale of an asset used in farming can be treated as unsecured debt that is not entitled to priority and ultimately discharged. Without this modification, a farmer faced with selling assets to satisfy creditors could trigger substantial tax liability that would impair the chance to reorganize the farming business under Chapter 12. Such a farmer could be forced into liquidation.
A question that was addressed by a federal trial court in Indiana in 2021 was how taxes that the debtor had already paid are to be treated. Can previously paid or withheld taxes be pulled back into the bankruptcy estate where they are “stripped” of their priority (i.e., deprioritized)? That is a very significant question for a Chapter 12 farm debtor that also has off-farm income of a spouse that helps support the farming operation.
In United States v. Richards, No. 1:20-cv-02703-SEB-MG, 2021 U.S. Dist. LEXIS (S.D. Ind. Sept. 30, 2021), the debtors, a married farm couple, filed Chapter 12 bankruptcy in 2018 after suffering losses from negative weather events and commodity market price declines during 2013 through 2015. The primary lender refused to renew the loan which forced liquidation of the farm’s assets in the spring of 2016. During 2016, the debtors sold substantially all of the farm equipment, vehicles and other personal property assets as well as grain inventory. The proceeds were paid to the primary lender as well as other lenders with purchase money security interests in relevant assets. After filing Chapter 12, the debtors sold additional farmland. The asset sales triggered substantial income tax obligations for 2016, 2017 and 2018 tax years. The debtors Chapter 12 plan made no mention concerning whether off-farm earnings, tax withholdings or payments the debtors voluntarily made to the IRS, or a claim or refund would remain property of the bankruptcy estate after Plan confirmation. The plan did, however, divide the debtors federal tax obligations into 1) tax liabilities for income arising from the sale, transfer, exchange or other disposition of any property used in the debtors’ farming operation “Section 1232 Income”; and 2) tax liabilities arising from other income sources – “Traditional income.” Tax liabilities associated with Traditional Income would retain priority status, but taxes associated with Section 1232 Income would be de-prioritized (regardless of when the liability was incurred) and treated as general unsecured claims that would be discharged upon Plan completion if not paid in full. Under the reorganization Plan, the debtors would pay directly the tax liability associated with Traditional Income incurred after the Chapter 12 filing date. Under the Plan, unsecured claims would be paid on a “pro rata” basis using the “marginal method” along with other general unsecured claims. The Section 1232 taxes would be computed by excluding the taxable income from the disposition of assets used in farming from the tax return utilizing a pro forma tax return. The Plan was silent concerning how the Debtors’ withholding payments and credits for each tax year were to be applied or allocated between any particular tax year’s income tax return and the corresponding pro forma return.
The IRS filed a proof of claim for the 2016 and 2017 tax years in the amount of $288,675.43. The debtors objected to the IRS’s claim, but did seek to reclassify $5,681 of the IRS claim as general unsecured priority status. The IRS failed to respond, and the bankruptcy court granted the debtors approximately $280,000 in tax relief for 2016 and 2017. The debtors then submitted their 2018 federal and state returns showing a tax liability of $58,380 and their pro forma return for 2018 excluding the income from the sale of farm assets which showed a tax liability of $3,399. The debtors, due to withholding and estimated tax, inadvertently paid $9,813 to the IRS during 2018. They claimed $6,414 was an overpayment and listed that amount on the Pro Forma return as a refund. The IRS amended its proof of claim and asserted a general unsecured claim of $42,200 for the 2018 tax year (excluding penalties and interest). The IRS claimed that none of the debtors’ tax liability qualified for non-priority treatment under 11 U.S.C. §1232, and that it had a general unsecured claim for $42, 220 for the 2018 tax year. To reach that amount, the IRS allocated tax withholdings and credits of $9,813 to the assessed tax due on the debtors’ pro forma return which reduced that amount to zero, and then allocated the remaining $6,414 of withholdings, payments and credits to the outstanding tax liability of $48,634. IRS later added $6,347 of net investment income tax that the debtors had reported on their return but IRS had excluded due to a processing error. The debtors objected to the IRS’s claim and asserted it should not be increased by either the $6,414 overpayment or the $6,347 of net investment income tax. The debtors sought to adjust the IRS claim to $54,981 and have the court issue a refund to them of $6,414 or reduce distributions to the IRS until the refund obligation had been satisfied. The IRS objected on the basis that the court lacked jurisdiction to compel the issuance of a refund or credit of an overpayment, and that the debtors were not entitled to the refund or credit of the overpayment shown on the pro forma return as a matter of law.
The bankruptcy court sustained the debtors’ objection to the extent the 2018 refund was applied to the IRS’s claim in a manner other than provided for under the confirmed plan. Specifically, the bankruptcy court held that the IRS had exercised a setoff that was not permitted under 11 U.S.C. §553 which violated the plan’s bar against any creditor taking any action “to collect on any claim, whether by offset or otherwise, unless specifically authorized by this Plan.” But, the bankruptcy court held that it lacked jurisdiction to compel the issuance of a refund or credit of an overpayment and that the debtors were not entitled to the refund or credit of overpayment as a matter of law. This was because, the court determined, the refund was not “property of the estate” under 11 U.S.C. § §542 and 541(a). Later, the bankruptcy court held that the overpayment reflected on the pro forma return was “property of the estate” and withdrew its prior analysis of 11 U.S.C. §§542 and 505(a)(2)(B). Thus, the bankruptcy court allowed the IRS’s 2018 general unsecured tax claim in the amount of $54,981 and ordered the Trustee to pay distributions to the debtors until the overpayments had been paid to the debtors.
The IRS appealed, claiming that the bankruptcy court erred in allowing the IRS’s proof of claim in the amount of $54,981 rather than $48,567, and ordering the IRS to issue the debtors a refund or credit of any overpayment in the amount of $6,414. Specifically, the IRS asserted that 11 U.S.C. §1232 did not provide the debtors any right to an “overpayment” or “refund” because it only applies to “claims” - tax liability after crediting payments and withholdings. The IRS based its position on Iowa Department of Revenue v. DeVries, 621 B.R. 445 (8th Cir. B.A.P. 2020). However, the trial court noted distinctions with the facts of DeVries. Here, the sale of property at issue occurred post-petition and involved a claim objection after the Plan had already been confirmed. The appellate court noted that the IRS did not object to the terms of the Plan, and under 11. U.S.C. §1232 the debtors can deprioritize all post-petition Sec. 1232 liabilities, not just a portion. The application of the marginal method resulted in a tax liability of $54,981 to be paid in accordance with 11 U.S.C. §1232. The non-§1232 tax liability was $3,399. The debtors inadvertently paid $9,813 to the IRS and were entitled to a refund of $6,414, and the IRS could not apply that amount against the Sec. 1232 liabilities in calculating its proof of claim. The refund amount was “property of the estate” under 11 U.S.C. §1207(a)(2).
Note: On November 30, 2021, an appeal was docketed with the U.S. Circuit Court of Appeals for the Seventh Circuit.
Devries and Richards are important cases for practitioners helping farmers in financial distress. 11 U.S.C. §1232 is a powerful tool that can assist making a farm reorganization more feasible. The Indiana case is a bit strange. In that case, the debtors were also due a refund for 2016. A pro-forma return for that year showed a refund of $1,300. Thus, the issue of a refund being due for pre-petition taxes could have been asserted just as it was in the Iowa case. Another oddity about the Indiana case is that the 2018 pro-forma (and regular) return was submitted to the IRS in March of 2019. Under 11 U.S.C. §1232, the “governmental body” has 180 days to file its proof of claim after the pro forma tax return was filed. The IRS timely filed its proof of claim and later filed an amended proof of claim which was identical to the original proof of claim. The IRS filed an untimely proof of claim in one of the other jointly administered cases.
Procedurally, in the Indiana case, a Notice regarding the use of 11 U.S.C. §1232 should have been filed with the court to clarify the dates of Notice to the IRS (and other governmental bodies) of the amount of the priority non-dischargeable taxes and 11 U.S.C. §1232 taxes to be discharged under the plan. That is when the issue of the refund would have been raised with the IRS. However, there was no Notice of the filing of the pro-forma return with the court. It will be interesting to see how the U.S. Court of Appeals handles the Indiana case on appeal.
Note: Going forward, Chapter 12 reorganization plans should provide that if a pro-forma return shows that the debtor is owed a refund the governmental bodies will pay it.
Conclusion
The next article will detail the Sixth and Fifth most important ag law and tax developments of 2021. Stay tuned.
January 4, 2022 in Bankruptcy, Civil Liabilities, Income Tax | Permalink | Comments (0)
