Sunday, October 13, 2024

Accumulated Earnings; Starting in Farming; Ag Data and Selling the Farm and Residence

Overview

The legal and tax issues that farmers and ranchers can potentially face are practically innumerable.  Today I have pulled four more out of the hat to briefly discuss.  The first one is one that can occur if you have a C corporation and retain too much of the corporate earnings in the corporation.  The next one discusses the possibility of using the funds in a 401(k) as start-up capital for a farming business.  Will it work?  What might be a trigger for the IRS to examine?  Then I turn my attention to Ag Data.  With any technology there are pros and cons.  What might some of those be for Ag Data?  Finally, I briefly discuss how to best utilize the home-sale gain exclusion rule when selling a farm.

More food for thought on the topic of ag law and taxes – it’s the topic of today’s post.

Accumulated Earnings Tax

The accumulated earnings tax is a tax you may not have heard about.  But, if your farming business is in a C corporation or an S corporation that used to be a C corporation, it’s a tax you should be aware of. 

The accumulated earnings tax is a 20 percent penalty that is imposed when a corporation retains earnings over $250,000 that are beyond the reasonable needs of the business instead of paying dividends.  Not paying dividends avoids the shareholder-level tax on dividends. 

Whether a purpose exists to avoid the shareholder-level tax is a subjective determination based on the facts and circumstances.  Don’t unreasonably accumulate corporate earnings while not paying dividends.  Also, don’t use corporate earnings for investments unrelated to the farming business.  Corporate loans to a shareholder for personal purposes are a “no-no” as is the use of corporate funds for a shareholder’s personal benefit.

Make sure you document why you are retaining earnings.  Such reasons as needing cash to buy more farmland or insuring against business risks or buying out a senior member of the family business are fine.

But, again, make sure you record your reasons for the accumulations in your corporate annual meeting minutes and other corporate documents.  And remember, if the accumulated earnings tax applies, it’s in addition to what the corporate tax liability is.  It’s a pure penalty.

Using a 401(k) for Start-Up Capital

One of the drawbacks to starting in farming on a full-time basis is the lack of capital.  But you just might have a substantial asset that you could tap to create the necessary working capital. 

If you have a 401(k), you might be able to use the funds to start a farming business.  To do this, you will need to create a C corporation to establish a 401(k) plan and then roll over your current 401(k) at the old employer into the new 401 (k) plan.  The new plan will then buy shares in the corporation and become an owner.  The money put into the corporation will then become the working capital that the corporation can use to buy equipment and plant crops and so forth. 

There is no limit on how much stock the 401(k) can buy.  This means that unlike borrowing money from a 401(k) which is limited to $50,000 or cashing in the plan and paying taxes and a 10 percent penalty on the funds received, you can maximize the amount of capital you put into the farm business.

The IRS has noted some abuses with these transactions.  Some people have set up a corporation simply to buy a motor home for example.  If you do that and get audited, you can expect the IRS to disallow the purchase for tax purposes.  But if you use the cash to create a farming entity and will be actively farming, there should be no issue with using your 401(k) to fund it. Actively farming – that’s the key.

Ag Data and Proof of Damages

Farmers have several reasons to collect ag data about their farming practices.  One of those might be to prove damage to crops in court.  In one recent case, the management of a lake dam increased the lake level and made farm field tile in the area ineffective to drain significant rainfalls.  The result was that water ponded in the fields and significantly reduced crop yields.  But could the farmer prove his damages in terms of lost yield and revenue?

With harvesting data, the court was able to see exactly where the flooded areas of the fields were and how flooding specifically affected yields.  The data showed that flooding, and not soil type, was the reason for the lower yields in the flooded parts of the fields.  Drone photos were also used to confirm the yield data.  The court could see how the pictures of the fields matched the harvest data.  Comparison data from nearby fields that did not drain into the lake watershed was also used to show what the yield would have been without the elevated lake level. 

The court awarded the farmer almost $500,000 in damages for crop loss and field tile.  Ag data helped make the case and will be an important part of many ag tort cases in the future.  

The case is Houin v. Indiana Department of Natural Resources, 205 N.E.3d 196 (Marshall Co. Cir. Ct. 2021), aff'd. in part and rev'd in part, Indiana Department of Natural Resources v. Houin, 191 N.E.3d 241 (Ind. Ct. App. 2022).

Utilizing the Home Sale Exclusion When Selling the Farm

When selling the farm, how much land can be carved out and sold with the farm home to qualify for a special tax break? 

For married taxpayers that file jointly up to $500,000 of gain that is attributable to the sale of the taxpayer’s principal residence can be excluded from income. It’s one-half of that amount for a taxpayer that files as a single person.  But what if the farm sale also involves the residence?  How much (if any) of the farmland and outbuildings can be included with the residence to fill up that $500,000 amount?

Under current tax regulations, farmland can be treated as part of the principal residence if it is adjacent to land containing the home and is used as part of or along with the home. What is the practical application of those requirements?  The IRS rulings and court decisions indicate that the barnyard and areas used in connection with the home can be included as the “residence” portion of the sale.  Also, local zoning rules can come into play.  For many farm sales, an acre or two can likely be included with the home. 

Of course, each situation is dependent on the facts and the outcome depends on the particular situation.  But, if the facts support it, including at least some adjacent land with the principal residence can be a significant tax-saving technique.  It’s best to fill up that $500,000 amount if your facts allow you to do it.

Conclusion

It’s harvest season, so for those of you in harvest be careful and use common sense.  I have been on the road quite a bit recently – from North Dakota to Iowa to western Nebraska.  This week my travels take me to Idaho for an all-day tax seminar followed by a day of Steelhead fishing on the Salmon River.  Hopefully, I’ll get some good pictures to share with you.  Then it’s on to west Texas for two-days of tax lecturing.  Then a couple of events in Kansas before the fall KSU Tax Institutes begin.  I have also mixed in a couple of events for high school students – trying to plant seeds in the minds of young people of the need for well-trained rural attorneys.  I enjoy their questions and their enthusiasm and energy.  A tip of my hat to their teachers – I couldn’t do it.

October 13, 2024 in Business Planning, Civil Liabilities, Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, September 24, 2024

More “Stuff” in the Ag Law and Tax World

Overview

Agricultural law and taxation is very dynamic.  It deals with real issues facing farmers and ranchers and isn’t just legal theory that one sits around and contemplates – it’s reality.

With today’s article, I look at a few more common issues facing farmers, ranchers and rural landowners in general. 

SAF fuel, R&D credit, drones and cleaning fencerows – these are the topics of today’s post.

Sustainable Aviation Fuel

The USDA’s “Climate Smart Agriculture (CSA) Program” establishes practices for cultivating corn and soybeans for use as sustainable aviation feedstocks.  A clean fuel tax credit is available for those that sell or use sustainable aviation fuel or SAF, and farmers are being incentivized to adopt “sustainable” farming practices to grow crops used to produce the fuel.  The credit applies for each gallon of SAF produced.  The purported idea is to reduce greenhouse gas emissions. 

USDA received millions of dollars under the Green New Deal (a.k.a. the “Inflation Reduction Act of 2022) and then established the idea of CSA farming practices.  A tax credit was also created for 2023 and 2024 (I.R.C. §40B) for the production of “clean” fuel.  The whole deal is “hooked” together via contracts between USDA and major national commodity groups who, in turn, enter into agreements with third parties to certify that a farmer (who is also a contracting party) is growing corn and soybeans in an approved manner.  Essentially, a corn or soybean farmer must use no-till and cover crops. 

An ethanol plant receiving the crops grown in the government-approved manner can reduce it’s carbon score perhaps enough that the SAF produced will qualify the plant for a credit (switching to I.R.C. §45Z after 2024) for 2025 and 2026. 

But there’s no way to “identity preserve” corn and make sure that’s the only corn that goes into the SAF.  Another problem is that powering airplanes with crops is inefficient and unsustainable.  Some studies indicate that it takes 1.7 gallons of corn ethanol to produce a gallon of SAF.  To reach the U.S. goal of 35 billion gallons of ethanol-based SAF, 114 million acres of corn will be needed.  Another “laugh” in all of this is that the government, in putting together the model to measure the reduction in a plant’s carbon score as a result of the way crops are produced, didn’t account for the fuel used in producing the crops.

Oh, in one of the producer contracts I reviewed recently for farmer, the following provision was included:

"Lifecycle Emissions Reductions. The [national commodity organization] Partnership for Climate-Smart Commodities will compensate Producer for practices believed to contribute to lifecycle GHG emissions reductions. This compensation is in no way based on real or perceived soil carbon sequestration.” [emphasis added].

Carbon reduction… yeah…  I am thinking the point of all of this is something other than reducing carbon.  Be careful of any crop production contracts that you sign.

Research and Development Credit

A business can potentially be eligible for a tax credit for qualified expenses associated with research and development (R&D). Over the years, Congress has expanded the availability of the credit, and many farmers may now qualify to take it.  But the provision is quite detailed and there are some unscrupulous promoters. 

The R&D tax credit might apply if your farming operation has qualifying research expenses.  The credit could be about 10 to 15 percent which can reduce payroll tax or your overall tax burden.   But there’s a four-part test you must satisfy.  The research must create a new or improved product or process to increase performance, function, reliability or quality. The research must also involve experimentation and minimize uncertainty about the development of a product or process.  Finally, the research must rely on hard sciences such as engineering, chemistry or biology.

Can it work for you?  Possibly.  The IRS says your entire farm is not a research lab.  But expenses associated with a test plot might work.  That’s a point some promoters don’t clearly make.  Indeed, last year the IRS criminal investigation division examined an R&D promoter that was aggressively targeting farmers.  

Also, you probably should incur at least $100,000 of qualified expenses to make it worthwhile for tax purposes. 

Drones, Privacy and the U.S. Supreme Court

The use of drones in agriculture is increasing.  Some of the uses of drones include scouting crops and monitoring livestock.  But drones can also be used for questionable purposes.  Soon the U.S. Supreme Court will consider whether to hear a case involving the Texas drone law. 

All states have drone laws outlining the permissible and impermissible use of drones.  The Texas law, like many other states, has surveillance provisions and no-fly provisions.  The law says that a drone can’t be used to capture an image of an individual or privately owned real property with the intent to conduct surveillance. Newsgathering is not an exempted use.  And, the law’s no-fly provision makes it unlawful to fly a drone over certain structures including a confined animal feeding operation. 

Two media organizations challenged the law as unconstitutional on free speech grounds and the trial court agreed.  But the appellate court reversed.  Now the U.S. Supreme Court is going to consider whether to take the case at a conference on September 30.  The case is an important one for agriculture, particularly because of the vulnerability of farming and ranching operations and agribusinesses that have property in the open to being surveilled by the government., as well as organizations that want to do them harm.  That last point is particularly true with respect to confinement animal operations.

The case is National Press Photographers Association v. McCraw, 90 F.4th 770 (5th Cir. 2024), pet. for cert. filed, No. 23, 1105 (Apr. 9, 2024). 

Issues when Cleaning Out a Fencerow

Cleaning up fencerows seems to be an ongoing project.  But the cleanup process can generate legal issues that you might not have thought about.  For example, what should you do if there’s a tree in the fence line?  In that situation, each adjacent owner has an ownership interest in the tree. It’s considered to be jointly owned, and you could be liable for damages if you cut it down and your neighbor objects.  But, if only the branches or roots of a tree extend past the property line and onto an adjoining neighbor’s property, the branches and roots don’t give the neighbor an ownership interest in the tree.  In that situation, you can trim the branches that hang over onto your property.  That’s an important point, for example, if you are dealing with a thorn tree that can puncture tires.

Always make sure to trim branches, bushes and vines on a property line with care.  Keep the neighbor’s rights in mind when doing the cleanup work.  Maintaining good communication is aways beneficial when property line work is involved.  Also, if a neighbor’s tree falls onto your property, it’s your responsibility to clean up the mess – but you can keep the resulting firewood.  The converse is also true.  And, it’s not a trespass to be on your neighbor’s side of the fence when doing fence maintenance, such as cleaning out a fence row.

Conclusion

That’s another “snippet” of various legal and tax issues.  More next time.

September 24, 2024 in Civil Liabilities, Contracts, Environmental Law, Income Tax, Real Property | Permalink | Comments (0)

Thursday, September 12, 2024

Contracts; Insurance and Property Rights - Impacts for Your Farming/Ranching Operation

Merger Clauses in Contracts

Normally the terms of a written contract define the parameters of a deal.  That’s particularly the case if the contract contains a “merger” clause.  That’s a clause that says the terms of the written agreement constitute the entire understanding of the parties. But, without a merger clause, it might be possible to introduce evidence of additional terms or agreements that the parties entered into that might be contrary to the contract’s written terms. 

For example, assume you agree to sell three acres so the buyer can build a house and the contract says that the buyer gets possession after you harvest your growing crop.  But you and the buyer agree orally that the buyer can get possession early by paying you for the amount of lost net crop income if possession is taken before crop harvest.  The buyer wants possession early and you provide an invoice for your estimated lost income.  The buyer then pays for building materials, but you then change your mind and want to stick to the contact language on possession occurring after harvest.  Without a merger clause in the written sales contract, the buyer will have a good argument that payment of your invoice for crop damage is enough to trigger early possession.

Tort Liability and Installment Land Contracts

Sometimes agricultural land is sold by an installment sale contract.  It’s a method for the long-term financing of farmland purchases.  The buyer gets possession and equitable title, but legal title stays with the seller until a specified part of the principal and interest has been paid.  But does that mean that the seller has liability for damage to the property or persons on the property while holding legal title?  

The seller finances the purchase of farmland under an installment sale contract and retains legal title until a certain amount of principal and interest has been paid.  The down payment is usually low which helps beginning farmers and others with minimal amounts of cash. The buyer is also normally given possession, even though the general rule is that possession follows legal title.  In most cases, the party in possession pays real property taxes and assessments, and the buyer typically has an obligation to insure the premises either at the time the contract is entered into or at the time of possession.  That’s an important point. 

A purchaser’s status as an equitable owner means that the seller under an installment land contract is not liable for torts on the property once it has been conveyed to the buyer.  It’s the buyer’s possession of the property that is the key.  And, that’s why it’s important that the buyer carry insurance even though the seller still has legal title.

Liability Insurance

Liability insurance is part of the overall risk-management program for a farm or ranch.  But, when the farming or ranching activity changes, it’s a good idea to double-check to make sure existing coverage is adequate or whether a policy rider needs to be obtained.

In a recent case the insured’s homeowner’s policy provided coverage to others “caused by an animal owned by or in the care of an insured.”  The insured then bought 10 black heifers and penned them inside a barbed-wire enclosure behind his home.  But the heifers got out and onto the adjacent road where a motorist hit them.  The motorist sued for damages and the insurance company denied coverage under a policy exclusion for “bodily injury or property damage arising out of business or farming engaged in by an insured.”  The policy defined “farming” as “the operation of an agricultural… enterprise…” but did not define the term “enterprise.” 

Despite the somewhat unclear policy language, the trial court concluded that the insured’s purchase and ownership of the cattle constituted an “enterprise” within the exclusion’s scope.  The appellate court affirmed. 

Make sure you evaluate your coverage when circumstances change. While it’s common to evaluate liabilities at insurance renewals, periodic checks on exposures can avoid coverage gaps like the one in this case.

The case is Clark v. Alfa Insurance Corporation, No. 2022-CA-01251-COA, 2024 Miss. App. LEXIS 296 (Miss. Ct. App. Jul. 23, 2024).

Property Rights

Property rights are a fundamental constitutional right.  But recently the executive branch and certain administrative agencies have ventured into the realm of property rights in a negative way for rural landowners. Involved is a global agenda couched in altruism – saving people from the ravages of “climate change.”   

A 2012 Earth Summit established a goal of setting aside 50 percent of the world’s land and water for conservation by 2050.  In late January 2021, the President issued an Executive Order establishing a goal of putting 30 percent of U.S. land and water under permanent government control by 2030. That’s in addition to the 36 percent of U.S. land that is already owned or controlled by federal and state governments. At the same time, the Interior Department issued an order removing state and local control over federal land acquisitions.

Lawsuits have been filed challenging government control of private land that would curtail mining, ranching and other activities, and one State passed a law allowing it to overrule some federal directives.  Historically, courts deferred to administrative agency efforts to withdraw land and natural resources from private use, but that deferential standard has now changed.  It will take some time to see how that works out in the courts.

Also, some legal commentators are asserting that the U.S. Constitution should be used to negatively impact private property rights because of “climate change.”  They’re calling for a “constitutional revolution.”  That’s worth keeping an eye on.  Land is the number one asset for farmers and ranchers and to the extent the government controls the land or farming and ranching activities, it controls the means of food production.

Stay tuned.

September 12, 2024 in Civil Liabilities, Contracts, Insurance, Real Property, Regulatory Law | Permalink | Comments (0)

Sunday, August 25, 2024

Kansas Supreme Court Upholds Property Rights – Right-to-Farm Law Inapplicable when Farming Operation Not in Compliance with State Law – All of It

Overview

The Kansas Supreme Court has affirmed two lower courts with all of the opinions providing a thorough explanation of property rights with respect to road ditch rights-of-way, as well as the common law of trespass and nuisance and the application of the Kansas Right-to-Farm law.  The case involved what is perhaps the most egregious ag nuisance case in the history of Kansas that has reached the Kansas Supreme Court.  

Of trespass, nuisance and right-to-farm laws – it’s the topic of today’s post.

Background Facts

In Ross v. Nelson, No. 125,274, 2024 Kan. LEXIS 78 (Kan. Sup. Ct. Aug. 23, 2024), aff’g., 63 Kan. App.2d 634, 534 P.3d 634 (2023), the defendant (Nelson) owned multiple farming operations and installed about two miles of pipeline in the road ditch right-of-way next to a public road to transport liquified hog waste to spread on his crop fields.  He installed the three underground pipes (two to carry water to his hog operation and one to carry the effluent) without the consent of the adjacent landowners (the plaintiffs).  He also did not follow the applicable county permitting process.  The defendant’s daughter-in-law later filled-out a permit application and paid the fee for installing the pipes but neither the county clerk nor Road and Bridge Supervisor ever signed the permit application.  The defendant also created an impression with the County Commissioners that he had the permission of the landowners adjacent to the roadway where he was wanting to install pipes.  The County Attorney advised the Commissioners that the adjacent landowners had to consent before the application could be approved.  But the fact remained that the Commission never granted approval to install the pipes and the County Attorney called the Sheriff who temporarily stopped the installation process.  However, the defendant later completed the installation. The Sheriff also contacted the Kansas Department of Health and Environment (KDHE), but the KDHE explained that it does not oversee piping installation between hog operations and disposal sites.  The KDHE regulates the disposal of hog waste.

Note:  The defendant consistently maintained that he didn’t need permission to install the pipes in the road ditch right-of-way.  He also lobbied the county commissioners and the state legislature for express authority to lay the pipelines.  His lobbying efforts were not successful. 

Once installed, the pipes ran for a mile along each of the plaintiffs’ road frontages.  The liquified hog manure was sprayed from a pivot irrigation system (and end gun) near a home of one of the plaintiffs.  The plaintiffs, also farmers, sued for trespass and nuisance. 

The spray from the pivot came within 200 feet of one of the plaintiffs’ homes.  As noted, neither of the plaintiffs gave permission to the defendant to lay pipes in the road right-of-way, and the defendant choose not to dispose of the hog waste on other land that he owned where no one lived nearby. 

In the Spring of 2019, the waste was pumped through the pipelines and effluent was sprayed on the field.  The plaintiffs filed a report with the Sheriff concerning the odor.  The report noted that hog waste mist would drift onto the plaintiffs’ property and sprayed one of the plaintiffs personally as well as their home which then became covered in flies.  The wife of one of the plaintiff couples moved to their Nebraska home.   One of the plaintiffs had planned to sell their farmland to one of their tenants, but the sale fell through because of the odor.

Trial Court

The plaintiffs sued for trespass and nuisance.  The trial court ruled for the plaintiffs on both issues.  On the trespass issue, the trial court noted that the defendant did not have a public purpose for installing pipes in the road right-of-way and he didn’t have permission – either from the landowners, the county or the legislature.   

The trial court also ruled for the plaintiffs on the nuisance issue.  The Kansas Right-to-Farm law didn’t apply to authorize the defendant’s conduct because the nuisance was the result of the defendant’s trespass. 

The trial court also added a claim for punitive damages. 

The jury returned a verdict of $126,720 in property damages for the plaintiffs, plus $2,000 in nuisance damages plus $50,000 of punitive damages. 

The defendant appealed.

Appellate Court

The appellate court affirmed and in doing so made some important points relevant to all farming operations.

Use of road ditch right-of-way.  The appellate court pointed out that a road ditch right-of-way cannot be used for private purposes without first securing the adjacent landowners’ permission or otherwise receiving local or legislative authority.  The right-of-way is owned by the adjacent property owners.  The public has an easement to use the roadway for travel, that’s it.  Shawnee County Commissioners v. Beckwith, 10 Kan. 603 (1873).  The ownership of the land and “everything connected with the land over which the road is laid out” does not pass to the public but remains with the owner of the underlying (and adjacent) land.  Id.  While the defendant lobbied the legislature for a change in the law on this point, the bill died in committee.  Thus, the defendant’s laying of the pipes in the road ditch right-of-way was a trespass. 

The appellate court specifically noted that “fee owners of real property containing a public roadway have a possessory right to use, control, and exclude others from the land, as long as they do not interfere with the public’s use of the road.  In contrast, the public has an easement over the property to use the road for transportation purposes…but not other rights beyond those purposes.  Any further use by member of the public may be authorized through state action, provided the landowner is compensated for the diminished property rights, or through the landowner’s consent.”  The scope of the public’s easement in a road ditch right-of-way, the court noted, must be for a public purpose.  Any private use must be merely incidental to the public purpose.  Stauber v. City of Elwood, 3 Kan. App. 2d 341, 594 P.2d 1115, rev. den. 226 Kan. 793 (1979).  

Because the defendant was using the road ditch right-of-way solely for his private purposes, he had no right to lay the pipelines without permission or official government authority.  He had neither.  The appellate court pointed out that it was immaterial that the pipelines didn’t interfere with public travel.  The appellate court also rejected as absurd and with no support in Kansas law the defendant’s argument that supplying pork for ultimate public consumption constituted a public purpose.  Consequently, the appellate court upheld the trial court’s determination that the defendant had committed a trespass.

Nuisance and right-to-farm.  The appellate court also upheld the trial court’s consideration of the nuisance claim and the resulting jury award for the plaintiffs on the nuisance claim.  The general legal principle underlying the doctrine of nuisance is that property must be used in such a manner that it does not injure that of others.  See, e.g., Wilburn v. Boeing Airplane Co., 188 Kan. 722, 366 P.2d 246 (1961).  However, there is a limitation placed on nuisance laws.  Many states, including Kansas, have adopted what are know as a “right-to-farm” law.  Such a law limits the extent to which a farm operation may be considered to be a nuisance.  Under the Kansas right-to-farm law, if a farming operation is conducted according to good agricultural practices and was established before surrounding nonfarming activities, the courts must presume that there is no nuisance.  Kan. Stat. Ann. §2-3202(a).  An activity is a good agricultural practice if it “is undertaken in conformity with federal, state, and local laws and rules and regulations.”  Kan. Stat. Ann. §2-3202(b). 

The defendant claimed that the Kansas right-to-farm law protected his fertilization practices from nuisance claims and that there was no evidence submitted at trial to support the jury’s finding that spraying the effluent as fertilizer was a nuisance. 

The appellate court noted that neither party raised on appeal whether the defendant’s activity predated the plaintiffs’ residing nearby.  Thus, the appellate court presumed that the right-to-farm law could apply to protect the defendant’s activity.  The appellate court also did address the fact that the plaintiffs were also farmers.  It has been held in a district court case in Kansas that the Kansas right-to-farm provisions do not apply to disputes between farmers, since the law is designed to protect farmers only from nuisance claims brought by nonfarmers. 

The defendant’s basic argument was that his manure spreading activity was protected by the right-to-farm law because he was in compliance with all federal and state and local laws rules and regulations.  This was in spite of him already found to have committed a trespass which allowed him to engage in the activity that gave rise to the nuisance claim.  The defendant (and amici) tried to finesse this hurdle by asserting that the common law of nuisance was not part of state law.  The appellate court concluded that this was another of the defendant’s absurd arguments and rejected it.  The appellate court determined that the nuisance was the result of a trespass (a violation of state law) and was not protected. 

Punitive damages.  The appellate court also upheld the trial court’s assessment of punitive damages against the defendant.  While an award of punitive damages is a relatively rare occurrence, it will be assessed where the court determines that the evidence warrants it based on the defendant’s particularly bad conduct.  Here, the appellate court determined that witness testimony was persuasive – the wife of one of the plaintiff couples hadn’t stayed at the home for a year; the plaintiffs couldn’t host guests at their home because of the hog odor; a plaintiff’s house was covered with the effluent mist and coated with flies; there was a lingering stench both outside and inside a plaintiff’s home; spray drifted onto one of the plaintiffs; and after the lawsuit was filed, the defendant sprayed twice as much fertilizer as he had the prior year.  The defendant also piled truckloads of manure across from one of the plaintiffs’ homes for several days straight.  The appellate court concluded that this was clearly “willful” and “reprehensible” conduct that warranted imposing punitive damages. 

The defendant claimed that the punitive damage award should be set aside due to “instructional error.”  He claimed that the jury verdict form was unclear as to whether the punitive damages were for trespass or for nuisance.  But his attorney failed to object to the verdict form and the appellate court determined that the form was not clearly erroneous. 

Kansas Supreme Court

On further review, the Kansas Supreme Court affirmed on all points.  The Court determined that the plaintiffs had standing to sue for trespass because they owned the fee interest to road’s subsurface that the defendant interfered with.  The Court also concluded that the defendant committed a trespass as a matter of law.  The defendant’s burying of pipelines in the subsurface area of the county road was within the scope of the highway easement.  Thus, without the plaintiff’s permission to put the pipelines in the road subsurface area, the defendant committed a trespass.  In addition, the scope of the highway easement was limited to public uses that facilitated the highway’s purposes.  The defendant’s use of the highway easement for his own personal purposes exceeded that scope.  The pipelines did not involve any public use.  In addition, the county had no authority to authorize any use of the highway easement that exceeded its scope that encumbered an adjacent landowner’s private property rights. 

The Court also agreed with the lower courts that the defendant was not entitled to summary judgment on the plaintiff’s nuisance claim.  The state right-to-farm statute was inapplicable because the defendant’s trespass meant that he was not in conformity with state law – a prerequisite for the application of the statutory protection from nuisance suits for farming operations.  See Kan. Stat. Ann. §2-3202(b). 

Note:  The Kansas Livestock Association and the Kansas Farm Bureau submitted a “friend of the court” brief on the defendant’s behalf claiming that erred by analyzing the right-to-farm issue under Kan. Stat. Ann. §2-32-2(b) and that Kan. Stat. Ann. §2-3202(c) applied instead (a provision that allows for the statutory protection from nuisance suits when an ag activity is expanded or changed, etc.).  However, the defendant never at any point claimed subsection (c) applied and the defendant’s legal counsel “specifically asserted that subsection (c) did not apply.”  As a result, the Court considered the issue to have been waived. 

Conclusion

The appellate court’s opinion and the Supreme Court’s opinion are both thorough and well thought-out.  The outcome of this litigation is a “win” for property rights in upholding an adjacent owner’s rights in road ditch rights-of-way and noting that the protections of the right-to-farm law is limited to situations where the farming operation accused of committing a nuisance is in compliance with state law – all of it, including state common law. 

The appellate court began its opinion by stating that the case arose “at the intersection of property rights, public roadways and the Kansas Right to Farm Act.”  Unfortunately, the path that led to that intersection was lined with arrogance, greed and a lust for power.  Fortunately, the Supreme Court affirmed the protection of property rights from being co-opted by, as the Court termed it, “an industrial hog-farming operation” that “ruffled more that a few feathers.” 

August 25, 2024 in Civil Liabilities, Real Property | Permalink | Comments (0)

Thursday, August 15, 2024

Ag Law and Tax – More Potpourri of Issues

Overview

The never-ending stream of legal and tax issues facing farmers and ranchers continues unabated.  There’s never a dull moment.  In today’s article I take a brief look as several of the issues that farmers and ranchers.

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

 Pre-Paid Farm Expenses and Death

Many cash-basis farmers pre-pay next-year’s input expenses in the current year and deduct the expense against current year income.  The IRS has specific rules for pre-paying and deducting.  In addition, what happens if you pre-pay and deduct expenses for inputs and then die before using them?

Three conditions must be satisfied to currently deduct pre-paid input expenses.  The pre-purchase must involve a binding contract for the purchase of specific goods of a minimum quantity that you will use in your farming business over the next year; you must have a business purpose for the purchase; and the pre-purchase must not materially distort your income over time.   Make sure you have a written contract for your pre-purchases that specifically identifies the goods you are buying to use in your farming business – such as seed, feed and fertilizer.  It’s not too difficult to come up with a business purpose for the pre-purchases such as locking in a price or a supply.

But what if you pre-pay for inputs in the fall and then die in the Spring after you file your tax return deducting the cost but before you can use the inputs?  For a cash basis farmer, those inputs are inventory at death.  That means they’ll be included in your estate and, assuming you have a surviving spouse they can pass to the surviving spouse who can then use them to put the crops in the ground and deduct their cost again on that year’s return. 

This happened in a Tax Court case a few years ago, and the IRS denied the deduction on the surviving spouse’s return as having already been taken.  But the surviving spouse won.  That’s the way the tax Code works because of the step-up in basis of the inputs at the death of the first spouse.

The case is Backemeyer v. Comr., 147 T.C. No. 17 (2016).

Expensing the Cost of Raising Calves

Often large ranches or dairies that are on the accrual method of accounting assume that the cost of cattle and cows must be capitalized and depreciated.  But that assumption may be only partially correct. 

So how should a ranch or a dairy on the accrual method handle the cost of cattle and cows purchased for dairy production or breeding?  While the normal rule is capitalization, the cost to raise calves born on the farm may be expensed as incurred, even if the accrual method of accounting is used.  That’s the case if the farm is not a tax shelter.  While the tax shelter rule hardly ever applies in the farm setting, it can if 35 percent or more of losses are allocated to limited partners.  An active farmer is not a limited partner and if the interest was passed down in a multi-generational family business, it’s also not a limited partner interest under the tax shelter rules.  

It's crucial that the animals are produced in a “farming business.”  That can be an issue if a significant part of the income comes from processing or packing milk products, for example.  In that situation, check to see whether there is more than a single business and how much income each business generates.

Of course, these complications can be avoided if a switch to the cash method of accounting can be made. That might be possible because many times the use of the accrual method is for non-tax business reasons.

Filing of False Forms 1099-Misc.

IRS Form 1099-Misc.is used to report various types of income.  It’s an information return that you send to another taxpayer.  Some of the most common reasons for filing Form 1099-Misc. include anyone you paid more than $600 to for the year for work performed for your business, professional services of any amount, royalty payments and other payments such as prize money or rent.  But be careful who you send a Form 1099-Misc. to. 

In a recent case, a farmer bought the defendant’s land at a court-ordered tax sale.  Shortly thereafter, the plaintiff received Forms 1099-Misc. reporting more than $15 million in connection with the land. The receipt of the Forms was due to the defendant’s issuance of them in retaliation for the plaintiff’s purchase of the land.

There are rules that penalize this behavior, and the plaintiff sued for damages for the fraudulently filed Forms.  The court agreed and imposed a per-Form penalty of the greater of $5,000 or actual damages and ordered that the Forms 1099(c) should reflect $0 in income paid.

So, if you get upset with someone, don’t think you can create a tax problem for them by filing a phony Form 1099-Misc.  It just might come back to bite you.

The case is Scot Thompson Farms, LLC v. Hap Holdings Trust, No 8:23CV25, 2023 U.S. Dist. LEXIS 107772 (D. Neb. Jun. 21, 2023), appeal filed, No. 23-2712 (8th Cir. Jul. 26, 2023) and case dismissed when appellant failed to timely file documents.

Beneficial Ownership Reporting & Unauthorized Practice of Law

At the beginning of 2024 a new reporting requirement kicked in for many businesses.  It’s part of a law designed to crack down on the use of shell corporations to evade paying taxes.  Presently, the courts are sorting out whether the requirement is constitutional.  Another question is whether a non-lawyer can fill out the report and file it. 

The new reporting rule requires most businesses that file with the state to register with the Financial Crimes Enforcement Network and file a report listing the business owners.  The filing is done online.  Businesses in existence before 2024 have until the end of this year to file. New businesses this year have 90 days to file.  Certain farm entities are exempt, but most smaller entities are not.  Even if your farm entity is exempt, you might have an equipment LLC, a land LLC, or any other related entity that’s not. 

Recently New Jersey took the position that if the report for a business is simple, a non-lawyer can complete it and file it.  A complex report must be completed by an attorney.  On the other hand, a recommendation has been made to the Iowa Supreme Court that it’s not the unauthorized practice of law for a non-lawyer to complete the report and file it.  That seems incorrect inasmuch as certain trusts that hold business interests are “reporting entities” and these trusts are very complex and will need to be interpreted. 

That means in Iowa your CPA or other tax professional can complete the report and file it for you.  Whether they will is an entirely separate question.

Blowing Dirt and Liability

Occasionally, there are news reports about traffic accidents due to blowing dirt from farm fields.  It tends to happen in the Spring during planting season when high winds blow dirt across a roadway and severely limit visibility.  That raises a legal question - is a farmer or other rural landowner responsible for injuries or death resulting from accidents where blowing dirt from their field is a factor? 

The matter of soil erosion from farm fields has been a concern of the federal and state governments for many years.  Federal programs designed to address soil erosion were first established as a result of the 1930s Dust Bowl, and some state laws also go back that far.

State provisions typically require landowners to take certain actions designed to minimize soil erosion.  In Kansas, for example, county commissioners can take action to minimize soil erosion.  The Iowa statute was upheld in 1979 against a constitutional challenge. 

But what about the liability issue for a farmer that owns land adjacent to a roadway?  The answer is that a farmer will generally not be liable for injuries or death resulting from obscured visibility due to blowing dirt if the farmer is following an approved soil conservation plan for the farm or is otherwise using generally accepted good farming practices. 

Conclusion

So many issues to discuss – these are the ones that have been on my mind recently. 

August 15, 2024 in Civil Liabilities, Income Tax | Permalink | Comments (0)

Thursday, August 8, 2024

More Legal Scenarios Involving Farmers and Ranchers

Overview

As I have noted many times before.  There are many ways in which the law intersects with the daily lives of farmers and ranchers.  Today’s article addresses several of those areas.  Just a little thinking out loud on a random basis.

Self-defense; Good Samaritan laws; preparing for the exit; and cleaning out fencerows – some random topics addressed in today’s post.

Self-Defense

A common question in agricultural settings is how far you can go in defending your personal property from those that would cause damage or steal.  

Agricultural property is often exposed to those who might want to steal, damage or destroy. Where’s the line drawn in far you can go to protect it?  In general, to protect property from vandalism and theft, you have a right to use force that is reasonably necessary under the circumstances.  But you can’t use force beyond what could reasonably be believed necessary under the circumstances, and you can’t use such force as is likely to lead to great bodily injury or death. 

A famous Iowa case from the early 1970s points out that you can’t use force that could physically harm or kill another person in defending your personal property if your life isn’t likewise threatened.  For instance, be careful using guard dogs to ward off trespassers.  The general rule with respect to guard dogs is that you can’t use any more force through an animal than you could personally.  So, if a guard dog injures or kills an intruder, it is the same as if you had done it. Likewise, liability for a dog's dangerous propensities cannot be avoided by posting a sign notifying trespassers of a dog's presence. 

You can take steps to protect your property. Just don’t use any force that is more than what is necessary for the situation.

Relatedly, what can you do within the bounds of the law to defend yourself from an animal such as a dog or a bull or other farm animal that isn’t yours?  In recent years, some states have enacted “stand your ground” provisions that allow you to use whatever force you think is necessary to protect yourself from an equivalent threat, up to and including lethal force.  You don’t have a duty to get away before using force. But you can’t just fire away at will.  Your use of deadly force must be justified – and that you’ll have to prove.  You don’t get a presumption that you could use deadly force. 

In rural settings, the issue often comes up with dogs and livestock that don’t belong to you.  If the animal threatens you with great bodily harm or death, then you can take the animal’s life.  But you’ll have to establish through video or eyewitness testimony that your action was justified.  You’ll likely be charged with animal cruelty or damage to property and then you must establish that you acted properly based on the circumstances.  Remember whether you acted properly is based on whether you had a reasonable fear for your life.  A jury will determine that question if the matter ends up in court. 

So, only take an animal’s life when it’s the last resort, and make sure you have evidence to back up your action. 

Good Samaritan Laws

You’re not legally required to render aid to another person who is in peril.  But does the law provide any protection if you try to help? 

The law used to discourage people from helping others in peril.  One extreme example was the Genovese case in Queens, New York in 1964.  Many people watched from their homes as Kitty Genovese was attacked in the early morning hours on her return to her apartment from work.  No one did anything until it was too late.  They later said that they feared liability for getting involved.  This event helped spur the enactment in all states of “Good Samaritan” laws.

A Good Samaritan law specifies that if you help a person in peril without expectation of compensation, you can only be held liable for injuries resulting from recklessness or willful intent to injure.  These state laws also provide slightly different treatment for emergency medical technicians and hospital staff.

Even though the law doesn’t require you to help someone else in peril, if you do you won’t be liable for any injuries resulting from your attempt to help unless your assistance is reckless, or you intentionally injure the person.  Kitty’s situation was horrible, but it did result in a good change in the governing legal rules. And, in agricultural settings, the rule can also apply in situations where aid is rendered to livestock in peril. 

Preparing for the Exit

When it comes to estate planning, we tend to think of wills and trusts and powers of attorney.  But there are other things you can do before those documents are drafted that will make creating those documents easier and smooth the transition upon death. 

When you work on your estate plan, don’t forget to organize and document other information for those that will need it.  A good idea is to put in a binder a list of your retirement plan information, and copies of health and life insurance policies. Burial plot location and funeral instructions.  Also, provide your email, computer and phone passwords as well as bank account information and data about your debts and bills.  Also, put in that binder copies of your driver’s license, birth certificate, social security card, and marriage license.  Also include documents related to real estate, a list of your assets, land that you own, stored crops, livestock and marketing contracts.  Also include copies of crop insurance policies and USDA program contracts and all your key business relationships. 

Make sure the right person knows where to find the binder and make sure they have access to it. 

Having this information collected will be helpful for any additional steps in the estate planning process. It will also likely allow more efficient use of an attorney’s time in drafting the necessary documents for your estate plan.

Issues when Cleaning Out a Fencerow

Cleaning up fencerows seems to be an ongoing project.  But the cleanup process can generate legal issues that you might not have thought about. 

When you’re cleaning out a fence row legal issues can arise that you might not have thought about.  For example, what should you do if there’s a tree in the fence line?  In that situation, each adjacent owner has an ownership interest in the tree. It’s considered to be jointly owned and you could be liable for damages if you cut it down and your neighbor objects.  But, if only the branches or roots of a tree extend past the property line and onto an adjoining neighbor’s property, the branches and roots don’t give the neighbor an ownership interest in the tree.  In that situation, you can trim the branches that hang over onto your property.  That’s an important point, for example, if you are dealing with a thorn tree that can puncture tires.

Always make sure to trim branches, bushes and vines on a property line with care.  Keep the neighbor’s rights in mind when doing the cleanup work.  Maintaining good communication is aways beneficial when property line work is involved.  Also, if a neighbor’s tree falls onto your property, it’s your responsibility to clean up the mess – but you can keep the resulting firewood.  The converse is also true.  And it’s not a trespass to be on your neighbor’s side of the fence when doing fence maintenance, such as cleaning out a fence row.

Conclusion

There will be more issues to discuss next time.

August 8, 2024 in Business Planning, Civil Liabilities, Criminal Liabilities, Estate Planning, Real Property | Permalink | Comments (0)

Sunday, July 21, 2024

More Legal and Planning Issues to Ponder

Overview

There’s always something to think about or plan for when it comes to ag law and tax.  Just educating yourself about law and tax in terms of being able to identify the issues that might arise can be very helpful to your farming business if you then find legal and tax counsel to assist you with your plan or take steps to minimize your legal exposure. 

More things legal and tax to ponder – it’s the topic of today’s post.

Sweat Equity – Don’t Count on It

Farming arrangements tend to be informal.  That can include reliance upon “sweat equity” as a transition plan.  The next generation builds up the business by investing money and time with the belief of ownership and control in the future.  All goes well…until it doesn’t.  The next generation may believe that their reward for “sweat equity” that is based on trust and commitment will be eventual ownership and control of the family farming operation.  But, this informality can be a risky approach.  The antidote to this risk is to formalize and document relationships and expectations and write out a solid plan for the future.  Also, maintaining clear and open communication and dealing in actual dollars is also important.  Sweat equity can’t be invested and it can’t be saved. 

If you want the business to continue into the next generation, make sure to structure the business with a solid operating agreement so that the farming heir is protected from losing the business due to issues with siblings.  If siblings are to be bought out, think through how the payments would be made. 

While sweat equity built up by working hard for future rights is commendable, it can lead to serious family fights and disappointment.  The last thing the next generation wants is to have invested substantial time and money in the family farm to end up not ever getting ownership and control. 

It’s money well spent to put a succession plan in place.  What’s your family farm legacy worth?

Farmers and Estimated Tax 

If you’re a farmer, you can make one estimated tax payment each year on January 15. If you don’t do that, you can elect to file and pay 100 percent of your income tax liability by March 1 each year.  This all means that qualification as a “farmer” is critical.  To be a farmer for estimated tax purposes, at least two-thirds of your gross income must be from farming.  Some items of income don’t qualify as farm income such as cash rent.  But gains from selling livestock do, and starting with 2023 returns, gains from selling or trading farm equipment also count as farm income.   

So if you have too much cash rent, you might not be a “farmer” for estimated tax purposes. But, if you qualified in 2023, you’ll automatically qualify in 2024. If you didn’t qualify last year, then make sure you don’t have too much non-farm income so that you’ll qualify this year.

If you don’t meet the definition of a farmer and you don’t make any estimated tax payments, you’ll get hit with a penalty.  Also, as a non-farmer, you’ll have to pay in the lesser of 100 percent of your 2023 tax or 90 percent of 2024 tax. 

If you think that this might apply to you, make sure to review it with your tax advisor to see what your options are.  You might have time this year to restructure lease arrangements or sell livestock or equipment so that you have enough farm income to count as a farmer.

Negligent Entrustment

If you have a farm employee, what’s the extent of your liability exposure, and what steps should you take to minimize those potential legal problems?  In a Texas case last year, a young man was killed while riding an ATV driven by the teenage son of a farming operation’s employee.  The accident occurred off the farm’s premises during a fishing excursion. The farm owner was sued for wrongful death based on negligent entrustment.  Both the trial court and the appellate court determined that there was no negligent entrustment because there wasn’t a special relationship between the ATV driver and the farm.  He wasn’t an employee and the accident occurred while the ATV was being used for personal rather than business purposes.  The courts also pointed out that the farm owner didn’t know or have reason to know that the employee’s son was an unlicensed driver or didn’t know how to handle an ATV. 

As a farm owner, make sure to carefully train employees on usage of farm equipment, machinery and vehicles.  A written guide for usage of these items in an employee handbook might be a good idea.  Address issues such as off-farm use and use by family members.  Also, make sure your liability insurance is adequate by getting a thorough review of what the policy does and does not cover.  Those steps could help minimize your liability exposure.

The case is Mitschke v. Borromeo, No. 07-20-00283-CV, 2023 Tex. App. LEXIS 5117 (Tex. Ct. App. Jul. 12, 2023).

Current Deduction vs. Capitalization

You can claim a tax deduction for amounts spent for repairs on your farm. But an expense that improves property cannot be currently deducted.  So, where’s the line drawn between the two?

The rules as to what is a currently deductible “repair” and what must be capitalized, added to basis and depreciated over time have never provided a bright line. The basic issue is distinguishing between deductible ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business, and amounts spent to restore property.  Amounts paid for incidental repairs are currently deductible.  But amounts paid for new property or for permanent improvements or betterments that increase the value of any property, as well as amounts spent to restore property should be capitalized and added to basis.

Expenses for materials and supplies are fully deductible if the items purchased will be used in the farming business over the next 12 months – that includes replacement tractor tires.  There is a safe harbor rule that can be used, but any amount beyond the safe harbor that is paid to improve existing property should be capitalized.  The rules are detailed and tricky.

So, the next time you overhaul that tractor engine or replace disc blades or work on your pivot irrigation equipment, make sure you know the tax rules that apply beforehand so you can get the best tax result for your farming business. 

Conclusion

Just some thoughts today to get you thinking about what can improve the bottom line of your farming operation.

July 21, 2024 in Civil Liabilities, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, June 23, 2024

Of Fences; Agritourism; Liquidity; Solar Panels & Blight; and Trees and Motorists

Overview

With today’s post I focus on additional common issues that farmers, ranchers and rural landowners frequently face. 

Fence Disputes

One of the more common questions that I get involves disputes concerning fences.  Fences are often critical in agriculture, so how can a dispute over fencing get resolved within the bounds of the law?   A good place to start is by checking the land records to see if prior owners had recorded a fence agreement.  If they did, the agreement would bind you and your neighbor.  If there is no recorded fence agreement, you could execute a new one and have it recorded with the County Register of Deeds.  Once it’s recorded it will bind all future owners.

If a boundary is in dispute because of conflicting surveys, any boundaries and markers set by the first survey control in a conflict with a subsequent survey.  This is true even if there were errors in the original survey. 

When a boundary dispute involves a disagreement between surveys, consider how the use of the land has been affected by the original survey’s location of the boundary.  If the fence was erected along the old but erroneous survey line, and you and your neighbor have actively farmed to the fence line, the fence should not be moved.  If the fence does not follow either the original survey or the later survey, the true boundary line may need to be designated.

As a last resort, if the issue is building or maintaining a fence, the “fence viewers” can be called to come out and make a view and a determination of responsibility.  Each state has its own procedure for requesting a fence view and resolving fence building and maintenance disputes. Do you know the rules in your state?

Agritourism

Most states have agritourism laws that are designed to provide enhanced liability protection for injuries to participants or spectators associated with the inherent risks of a covered activity.  Agritourism is generally defined broadly to include such things as corn mazes, hayrides, tours, roadside stands and other similar activities.  Posting warning signs might also be required to receive the protection of the statute, as might the registering of the property with the state. 

On the liability issue, a landowner is generally protected except for “wanton or willful” negligence.  Also, having participants sign liability release forms may be required.  State law might also provide tax credits and might protect the property’s ag tax classification.    

Engaging in an agritourism activity on your farm can be a good way to generate additional income, but make sure you know the details of your state’s law.  Also, your comprehensive farm liability policy probably won’t cover any claim arising from an agritourism activity.  That’s because it’s likely to be defined as a non-farm business pursuit of the insured that falls within an exception to coverage. 

Farms and Ranches – The Liquidity Problem

Concerns about the possibility of a reduced federal estate tax exemption are big in agriculture.  If a drop in the exemption would impact the farming or ranching business, is there a plan in place to pay the resulting tax?  It’s a real problem because ag estates are typically illiquid – farmers are often “asset rich, but cash poor.” 

Liquidity refers to how easy it is to convert an asset into cash.  Farmers and ranchers often have assets worth a substantial amount in terms of market value but may lack sufficient cash to meet current needs.  What is at the heart of the liquidity problem?  Farming and ranching often involves a substantial investment in capital assets.  There typically isn’t a pile of liquid funds or assets that can be easily converted into cash.  This can create problems upon death particularly if the goal is to keep the farm or ranch in the family for subsequent generations and there are both on-farm and off-farm heirs.  This is a big problem for some. 

While many estates don’t have an estate tax problem under current law, they could if the exemption drops.  For instance, a current gross estate of about $14 million or twice that for a couple would not incur any federal estate tax, but if the exemption drops to about half of those levels starting in 2026 as will happen if Congress doesn’t act, the tax bill could be substantial.  If there aren’t liquid funds to pay the tax, then the money will have to be borrowed or assets sold.  That’s not a good result, but there are planning steps that can be taken to correct the potential problem.  Yes, estate and business planning will cost, but solid plans for most people can be established for a fairly economical price – especially when you consider that the cost if for the protection and furtherance of your family’s farming/ranching legacy.

Solar Panels and Zoning

Many local zoning rules leave the door wide open to the potential for farmland to be converted into usage for solar panels – with no extra step required to go from agricultural to solar.  Some of this is occurring on prime farmland.  But leasing farmland for the placement of solar panels can destroy the land’s potential to return to farming.  That’s because often fine sand is spread on the farmland where the panels will be placed to kill off plant growth under the panels.  This doesn’t happen in every situation, but where it does, it destroys the possibility of growing anything in that field again without incurring significant remediation costs.  And solar energy agreements may only require remedial work at the end of the contract – which could be 50 years or so into the future.

One study has forecast that 83 percent of solar energy development will be on farm and ranchland unless current government policies are changed.  About half of that amount is projected to be on the nation’s most productive soil. 

Local zoning and planning commissions are at the forefront of the issue.  Rezoning or permitting should be necessary to convert farmland to solar fields – solar power generation is an industrial use.  Traditionally a change in zoning classification involves a public process.  That should be the case in this instance too.

Liability to Motorists

Here’s one I don’t get every day, although there are cases from time-to-time on this, and there was a somewhat related Kansas case a few years ago on the issue of a landowner’s duty (if any) to trim trees and brush near roadways.  The question is whether you are responsible if a tree on your farm falls onto an adjacent road and causes injury? 

The issue came up in a recent Texas case.  There a windstorm uprooted a large oak tree on a farm, and it fell across a road.  A driver hit the tree and sued for her injuries.  She claimed the farmer failed to inspect the farm premises to ensure that objects on the farm were not a hazard to motorists.  The farmer pointed out that there was no evidence that she had received any notice regarding problems with the tree and produced an affidavit from an arborist that the tree was healthy and would have required tremendous wind to blow it down. 

The court ruled for the farmer – there is no duty to parties injured off premises because the landowner is not in possession and control of those areas.  In addition, the court said that a landowner doesn’t owe a duty to make an adjoining road safe or to warn travelers of potential danger.  There can be exceptions in special situations, but none of those applied in the case.  For example, this case involved a farm in a rural area and there was no evidence that the farmer knew or should have known of the danger posed by the tree, and any potential danger wasn’t evident by looking at the tree.

And…motorists have a duty to drive according to the conditions – that includes being able to spot a large oak tree blocking both lanes of a road in time to avoid hitting it.

The case is Bell v. Cain, No. 06-23-00060-CV, 2024 Tex. App. LEXIS 1993 (Tex, Ct. App. Mar. 21, 2024).

June 23, 2024 in Civil Liabilities, Estate Planning, Real Property | Permalink | Comments (0)

Sunday, June 16, 2024

Rural Practice Digest - Substack

Overview

I have started a new Substack that contains the “Rural Practice Digest.”  You can access it at mceowenaglawandtax.substack.com.  While I will post other content from time-to-time that is available without a paid subscription, the Digest is for paid subscribers.  The inaugural edition is 22 pages in length and covers a wide array of legal and tax topics of importance to agricultural producers, agribusinesses, rural landowners and those that represent them.

Contents

Volume 1, Edition 1 sets the style for future editions - a lead article and then a series of annotations of court opinions, IRS developments and administrative agency regulatory decisions.  The lead article for Volume 1 concerns losses related to cooperatives.  The USDA is projecting that farm income will be down significantly this year.  That means losses will be incurred by some and some of those will involve losses associated with interests in cooperatives.  The treatment of losses on interests in cooperatives is unique and that’s what I focus on in the article.

The remaining 19-pages of the Digest focus on various other aspect of the law that impacts farmers and ranchers. Here’s an overview of the annotation topics that you will find in Issue 1:

  • Chapter 12 Bankruptcy
  • Partnership Election – BBA
  • Valuation Rules and Options
  • S Corporation Losses
  • Nuisance
  • Fair Credit Reporting Act
  • Irrigation Return Flow Exemption and the CWA
  • What is a WOTUS?
  • EPA Regulation Threatens AI
  • Trustee Liability for Taxes
  • Farm Bill
  • Tax Reimbursement Clauses in IDGTs
  • QTIP Marital Trusts and Gift Tax
  • FBAR Penalties
  • Conservation Easements
  • Hobby Losses
  • Sustainable Aviation Fuel
  • IRS Procedures and Announcements
  • Timeliness of Tax Court Petition
  • BBA Election
  • SCOTUS Opinion on Fees to Develop Property
  • Quiet Title Act
  • Animal I.D.
  • “Ag Gag” Update
  • What is a “Misleading” Financing Statement
  • Recent State Court Opinions
  • Upcoming Seminars

Substack Contents

In addition to the Rural Practice Digest, I plan on adding video content, practitioner forms and other content designed to aid those representing agricultural clients in legal and tax matters, and others simply interested in keeping up on what’s happening in the world of agricultural law and taxation.

Conclusion

Thank you in advance for your subscription.  I trust that you will find the Digest to be an aid to your practice.  Your comments are welcome.  mceowenaglawandtax.substack.com

June 16, 2024 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Sunday, June 9, 2024

From the Desk…and Email…and Phone… (Ag Law Style)

Overview

Today’s post is a summary of just a snippet of the items that have come across my desk in recent days.  It’s been a particularly busy time.  The semester has ended at the two universities I teach at, exams are graded and now the seminar season heats up in earnest for the rest of the year.  This week it’s Branson for a two-day farm tax and farm estate/business planning seminar.  Then it’s back to the law school to do the anchor leg of the law school’s annual June CLE.  Next week it’s a national probate seminar and a fence law CLE.  The following week involves battling the IRS on a Tax Court case and the line between currently deductible expenses and those that must be capitalized.  Oh, and I’ll soon start a new subscription publication.  The first edition of the first volume is about ready.  So stay tuned.

For now, today’s post is on miscellaneous ag law topics.

Aerial Crop Dusting

Most cases involving injury to property or to individuals are based in negligence.  That means that someone breached a duty that was owed to someone else that caused damage to them or injured their property.  But there are some situations where a strict liability rule applies.  One of those involves the aerial application of chemicals to crops.  It is perhaps the most frequent application of the doctrine to agriculture. It’s based on the notion that crop dusting is an inherently dangerous activity. In addition, some states may have regulations applicable to aerial crop dusting.  For example, in Arkansas, violation of aerial crop spraying regulations constitutes evidence of negligence, and the negligence of crop sprayers can be imputed to landowners. 

If you utilize crop dusting as part of your farming operation, it’s best from a liability standpoint to hire the work done.  In that event, if chemical drift occurs and damages a neighbor’s crops, trees or foliage, you won’t be liable if you didn’t control or were otherwise involved in how the spraying was to be done.  Especially if all applicable regulations are followed.

Right of First Refusal

A right of first refusal allows the holder the right to buy property on the same terms offered to another bona fide purchaser.  Once notified, the holder can either choose to buy the property on the same terms offered to a third party or decline and allow the owner to sell to the third party.  A right of first refusal can be useful in ag land transactions when there is a desire to ensure that a party has a chance to acquire the property. 

A right of first refusal can be useful in certain settings involving the sale of agricultural land.  Perhaps a longstanding tenant would like to be given a chance to acquire the leased land.  Or maybe a certain family member should be given the chance to buy into the family farming operation.  But it is critical that the property actually be offered to the holder of the right before it is sold to someone else.  If that doesn’t happen the owner can be sued for monetary damages and the third party that had either actual or constructive notice of the right of first refusal can be sued for specific performance.

When a right of first refusal is involved, it’s a good idea to record it on the land records to put the public and any potential buyer on notice.  Also, investigate changes concerning the property – such as to whom lease payments are being made.  The holder must stay vigilant to protect their right.

Ag Leases and Taxes

Leasing farmland is critical to many farmers and farming operations.  What’s the best way to structure an ag lease from a tax standpoint?  Tenants and landlords are often good at understanding the economics of a farm lease and utilize the best type of lease to fit their situation.  A farm lease can be structured to appropriately balance the risk and return between the landlord and tenant. 

There are also many income tax issues associated with leasing farmland.  For the tenant farmer, the lease income is income from a farming business.  That means it’s subject to self-employment tax.  It also means that the tenant can take advantage of the tax provisions that are available for persons that are engaged in the trade or business of farming. 

Whether the landlord gets those same tax advantages depends on whether the landlord is materially participating.  If so, the landlord has self-employment income, but is eligible to exclude at least a portion of USDA cost-share payments from income. The landlord can also deduct soil and water conservation expenses, as well as fertilizer and lime costs.  A landlord engaged in farming can also elect farm income averaging, can receive federal farm program benefits, and can have a special use valuation election made in the estate at death to help save federal estate tax. 

The right type of lease can be very beneficial. 

Corporate Loans

Lending corporate cash to shareholders of a closely-held corporation can be an effective way to give the shareholders use of the funds without the double-tax consequences of dividends.  But an advance or loan to a shareholder must be a bona fide loan to avoid being a constructive dividend.  In addition, the loan must have adequate interest. If it doesn’t meet these criteria, it will be taxed as a dividend distribution.  In addition, it’s not enough for you to simply declare that you intended the withdrawal to be a loan.  There must be additional reliable evidence that the transaction is a debt.  So, what does the IRS look for to determine if a loan is really a loan?

If you have unlimited control of the corporation, there’s a greater potential for a disguised dividend, and if the corporation hasn’t been paying dividends despite having the money to do so, that’s another strike.  Did you record the advances on the corporate books and records as loans and execute notes with interest charged, a fixed maturity date and security given?  Were there attempts to repay the advances in a bona fide manner?  The control issue is a big one for farming and ranching corporations, and few farm corporations pay dividends.  This makes it critical to carefully build up evidence supporting loan characterization. 

NewH-2A Rule

The H-2A temporary ag worker program helps employers who anticipate a lack of available domestic workers.  Under the program foreign workers are brought to the U.S. to perform temporary or seasonal ag work including, but not limited to, labor for planting, cultivating, or harvesting.  Recently, the Department of Labor published a Final Rule designed to enhance protections for workers under the H-2A program. 

Effective June 28, a new Department of Labor final rule will take effect.  The rule is termed, “Improving Protections for Workers in Temporary Agricultural Employment in the United States.”   The rule will impact the temporary farmworker program.  The rule’s purpose is to increase wage transparency, clarify when an employee can be terminated for cause, and prevent employer retaliation among temporary seasonal ag workers. There are also expanded transportation safety requirements, new employer disclosure requirements and new rules for worker self-advocacy.   

The rule is lengthy and complex, but here’s a few points of particular importance:

  • New restrictions on an employers’ ability to terminate workers;
  • Workers employed under the H-2A program have the right to payment for three-fourths of the hours offered in the work contract, even if the work ends early; housing and transportation until the worker leaves; payment for outbound transportation; and, if the worker is a U.S. worker, to be contacted for employment in the next year, unless they are terminated for cause.
  • An employer may only terminate a worker “for cause” when the employer demonstrates the worker has failed to comply with employer policies or rules or to satisfactorily perform job duties after issuing progressive discipline, unless the worker has engaged in egregious misconduct. The rule establishes five conditions that must be satisfied to ensure disciplinary and/or termination processes are justified and reasonable.
  • For vehicles that are required by Department of Transportation regulations to be manufactured with seat belts, the employer must retain and maintain those seat belts in good working order and prohibit the operation of a vehicle unless each worker is wearing a seat belt.

Only applications for H-2A employer certifications submitted to the Department of Labor on or after August 29 will be subject to the new rule. 

You can expect legal challenges to the rule.  But, in the meantime, if you use temporary foreign workers on your farm, you should start creating and implementing policies and procedures to comply with the new rule as well as updating your existing H-2A applications.

The rule is published at 89 Fed. Reg. 33898.

Conclusion

The topics in ag law and tax are diverse.  There’s never a dull moment. 

June 9, 2024 in Business Planning, Civil Liabilities, Contracts, Income Tax, Regulatory Law | Permalink | Comments (0)

Monday, April 1, 2024

Property Rights Edition – Irrigation Return Flows; PFAS; and the Quiet Title Act

Cranberry Bogs and the Clean Water Act

Courte Oreilles Lakes Association, Inc. v. Zawistowski, No. 3:24-cv-00128 (W.D. Wis. Filed Feb. 28, 2024)

The Clean Water Act regulates the discharge of pollutants from a fixed point into a water of the United States.  Not regulated is water runoff from irrigation activities on farms.  Historically, the EPA has interpreted this exemption to include runoff from irrigated dryland crops, rice farming and cranberry bogs.  This means a Clean Water Act permit is not required for these activities.     

But a recent case has been filed against a Wisconsin cranberry farm claiming that the discharges involved should not be exempt under the irrigation return flow provision.  The claim is that a channel and ditch are point sources of phosphorous and sediment discharges into the nearby lake when the bogs are drained.  Phosphorous and sediment are pollutants under the Clean Water Act, and the claim is that the water in the bogs is not used for irrigation, but to aid in the overall growing process and protect the cranberries from freezes and harvesting.

The case is in its early stages, but a ruling against the farm could have a big impact on the cranberry and rice industries nationwide.

PFAS and Rural Landowners

A PFAS is a widely used, long lasting chemical having components that break down slowly over time that have been used since the 1940s. It is found in water, air and soil all over the globe and are used for many commercial and industrial products.  Some studies have shown that exposure to PFAS may be linked to harmful health effects in humans and animals.  PFAS are a group of more than 15,000 chemicals that are associated with various cancers and other health problems. 

Note:  Presently, there is no known method for cleaning up PFAS contamination.   

The biggest potential problem for agriculture involving PFAS will likely be biosolids – the solid matter remaining at the end of a wastewater treatment process.  Biosolids are often land applied and there are benefits to doing so.  It recycles nutrients and fertilizers and creates cost savings on chemicals and fertilizers for farmers.  The uptake of PFAS by plants varies depending on PFAS concentration in soil and water, type of soil, amount of precipitation or irrigation, and the type of plant. 

Note:  The EPA treats PFAS as a hazardous substance under the Comprehensive Environmental Response Liability Act – that’s the Superfund law, and it can be a major concern for all rural landowners.  Indeed, in 2019, PFAS were discovered on farms in Maine and New Mexico resulting in the disposal of most of the livestock on the farms. 

In 2022, a Michigan 400-acre cattle farm (a Century Farm) was forced to shut down due to high levels of PFAS in the beef products from his cattle and in the soil at his farm.  The farm received biosolids from a municipal wastewater treatment plant to fertilize his crops which he later harvested and fed to his cattle.  Biosolids are a cost-effective fertilizer and are EPA-approved.  Unfortunately, the biosolids before they were sold to the cattle farm and, as a result of the PFAS investigation at the farm, beef products from the farm can no longer be marketed.  Normal screening is for pathogens and heavy metals (e.g., lead, arsenic and mercury), but most states don’t test biosolids for PFAS.  However, Michigan does conduct extensive PFAS investigations that includes testing municipal water systems and watersheds that have suspected contamination. 

The farm has sued an auto parts supplier (filed Aug 12, 2023, in Livingston County, MI) for the release of PFAS (hexavalent chromium) into the wastewater system that allegedly contaminated the biosolids.  The lawsuit seeks tens of millions of dollars in punitive damages to help cover the cost of remediating the farm’s soil and groundwater.

Note:  The State of Kansas does not currently test for PFAS in wastewater.  Sampling has occurred of a select number of mechanical wastewater plants for PFAS in the plants’ effluent since 2022, but the Kansas Department of Health and Environment has not sampled biosolids from those facilities. 

In early 2024, several Texas farmers filed suit against a major biosolid provider for manufacturing and distributing contaminated biosolid-based fertilizer that was applied to the plaintiffs’ farm fields resulting in damage to the land and personal health problems.  Farmer, et al. v. Synagro Technologies, Inc., No. C-03-CV-24-000598 (filed, Feb. 27, 2024, Baltimore Co. Maryland).  The claim is that the defendant either knew or should have known that it was putting a contaminated (defective) product in commerce.  The plaintiffs’ claims are couched in strict liability product defect, negligence and private nuisance.    

Some states have taken preemptive action.  For example, Maine has banned land application of biosolids and set up a fund for impacted farmers.  Other states are looking into providing compensation for disaffected farmers.

Quiet Title Act is not Jurisdictional – Implications for Property Rights

Wilkins v. United States, 143 S. Ct. 870 (2023)

Farmers and ranchers can sometimes find themselves in various legal battles with the Federal Government.  That’s particularly true in the U.S. West as it was in this case.  Here, the plaintiffs live along a dirt road in western Montana that provides access to a National Forest from a public highway. The prior owners of the land granted the federal government an easement in 1962 across the land by means of a road to provide government timber contractors access to the forest from the highway.  The deeds and an accompanying letter said the purpose of the road was for timber harvest.  For about 45 years, the government’s use of the easement didn’t interfere with the landowners’ property.  Then in 2006, the government posted a sign saying the road provided public access through private land.  The landowners sued in 2018 under the Quiet Title Act.  28 U.S.C. 2409a.  The Quiet Title Act allows a private landowner to sue the federal government for intrusion of the landowner’s private property if the lawsuit is brought within 12 years of the claim incurring – when the government expanded the scope of the easement.  In this case, the landowner’s sued just outside that 12-year window and the government claimed that, as a result, the court lacked jurisdiction to hear the case.

The trial court agreed and dismissed the case.  On appeal the U.S. Court of Appeals for the Ninth Circuit agreed.  Both of those lower courts held that the Quiet Title Act’s 12-year filing provision was jurisdictional and, as a result, the statute of limitations had run. 

The U.S. Supreme Court reversed, holding that the Quiet Title Act’s provision at issue (28 U.S.C. 2409a(g)) was a non-jurisdictional claims-processing rule that required certain claims-processing steps to be taken at certain times that must be completed before a lawsuit can be filed.  The Court, citing its decision in a tax case from North Dakota in 2022 said that a procedural requirement is only to be construed as jurisdictional when the Congress has clearly stated so in the statute at issue.  Boechler v. Comr., 596 U.S. 199 (2022).  Here, the Court determined that 28 U.S.C. §2409a(g) lacked such a clear congressional statement, and that nothing in the statute’s text or context gave the Court any reason to depart from the general rule of a time bar being non-jurisdictional.  Indeed, the Court held that the Quiet Title Act’s jurisdictional grant was in a separate section well separated from subsection 2409a(g) and that there was nothing there that conditioned the jurisdictional grant on the limitations period in subsection 2409a(g). 

Note:  Three dissenting Justices (including the Chief Justice) maintained that the general rule of a time bar being non-jurisdictional did not apply in this case because subsection 2409(a) is a condition on a waiver of sovereign immunity to be interpreted as a jurisdictional bar (time bar) to bringing a lawsuit.    

The Court’s decision means that the two landowners will get their chance in court to establish that the U.S Forest Service changed the terms of its easement to take some of their private property rights.  But there might also be broader implications that ultimately flow from the Court’s decision.  Clearly, property rights are a fundamental constitutional right.  Not so for the doctrine of sovereign immunity which isn’t found in the Constitution.  The Quiet Title Act is a tool for private property owners to seek redress for the government’s illegal appropriation of private property.  This is particularly important in the U.S. West.  There the federal government owns a high percentage of land that either surrounds or even cuts through private property.  Numerous federal agencies engage in activity that impacts private property rights.  Often it may be very difficult to determine when an intrusion occurs for purposes of a jurisdictional requirement under the Quiet Title Act. 

Wilkins could turn out to be a key case in the battle of property rights versus the federal government.

April 1, 2024 in Civil Liabilities, Environmental Law, Real Property, Regulatory Law, Water Law | Permalink | Comments (0)

Sunday, March 24, 2024

Bad Survey and Bad Name on Filed Financing Statement – Legal Issues Created

Overview

The legal system interacts with farmers, ranchers and rural landowners in numerous ways.  With today’s post, I take a look at a few of those. 

Court Sorts Out Damages Triggered by Erroneous Survey. 

Simmons v. Ryder, No. 364826

2024 Mich. App. LEXIS 1181 (Mich. Ct. App. Feb. 15, 2024)

Note:  What problems can occur if a survey is erroneous?  In this case the defendant acted based on his survey which turned out to be erroneous.  Read what happened.  What wasn’t part of the case is the liability of the surveyor business that made the erroneous survey.  The court’s opinion also provides guidance on how court’s determine damages in such cases.

The plaintiffs owned a residential tract adjacent to the defendant’s farmland.  The defendant’s survey denoted the boundary between the properties as being 31 feet onto what the plaintiff claimed was the boundary.  Based on the survey, the defendant cleared trees, shrubs and topsoil in the disputed area.

The plaintiffs sued for trespass and injury to their land and sought damages to restore the property.  The trial court awarded the plaintiff $1,995 of damages, the cost of replanting 21 arrowwood viburnum trees. The trial court also ordered than another survey be completed with the cost split between the parties. The trial court allowed the defendant to complete remedial excavation work, and also ruled that the plaintiffs were not entitled to damages for the installation of a fence.

The appellate court affirmed, concluding that the plaintiffs failed to provide evidence regarding the loss in their land value and their claimed amount of restorative costs.  In any event, the appellate court held that the damages awarded should not exceed the value of the property before the damage occurred.  The appellate court also upheld the trial court’s decision ordering the defendant to perform remediation work on the plaintiffs’ property.  The appellate court also upheld the trial court’s decision that the parties split the cost of the second survey which established that the initial survey was erroneous, and both parties were innocent with respect to the first survey.  It was the erroneous first survey that required the remedial work. 

Change in Name of Debtor Makes a UCC “Seriously Misleading”

In re Rancher’s Legacy Meat Co., 616 B.R. 532 (Bankr. D. Minn. 2020)

Note: The Uniform Commercial Code (UCC) has many intricate rules that must be followed closely.  Article 9 of the UCC governs financial transactions.  One rule requires that the debtor’s name on a filed financial statement must not be “seriously misleading.”  The rule is there to ensure that a party checking the public record will be assured of finding a filed financial statement when using the debtor’s correct legal name.  There are many cases on this issue and the case below is one of them. 

The debtor, a meat packing and processing company, was founded by two individuals, one of which was the creditor, operating under the name of Unger Meat Company (UMC). The creditor leased a building to the debtor for use as a processing plant and provided startup funds via two promissory notes. The creditor perfected a security interest in all the debtor’s equipment, inventory, and accounts receivable. UMC failed to show a profit and the creditor entered into an option agreement with a holding company to purchase UMC. Upon finalization of the sale, the holding company purchased the creditor’s shares in UMC and changed the name of the company to Rancher’s Legacy Meat Company.

Fourteen months after the name change, the creditor filed a UCC-3 Continuation Statement and listed the company’s name as UMC. After another three years had passed, the creditor filed an amended UCC-3 to change the debtor’s name to “Rancher’s Legacy.” The creditor sought collection on its notes and a few months later the debtor filed for Chapter 11 bankruptcy. The debtor argued that the appropriate procedure to re-perfect the creditor’s security interest was to file a new UCC-1 Financing Statement upon the debtor’s name change. The creditor argued that his filings appropriately re-perfected his security interest and therefore, he should be entitled to adequate protection payments. The bankruptcy court noted that Minnesota law provides that a financing statement becomes seriously misleading and ineffective when it fails to provide the debtor’s correct name. Additionally, when the financing statement is ineffective because of seriously misleading information, an amendment must be made within four months to perfect a security interest. The bankruptcy court held that the creditor’s security interest lapsed when four months had passed after the creditor’s financing statement became seriously misleading. Further, the bankruptcy court held that the creditor had the ability to re-perfect the security interest by filing a new UCC-1 Financing Statement. Although the security interest had lapsed, the language of the parties’ security agreement provided the creditor with the opportunity to file a second financing statement.

The creditor argued that his multiple filings were sufficient to giver proper notice to any other creditors under the UCC. The bankruptcy court disagreed and held that multiple filings can occasionally give proper notice, but not when the notice had become seriously misleading as in this case. The bankruptcy court pointed out that the validity of the financing statement depends primarily on its ability to give notice of the security interest to other creditors. Further, the bankruptcy court noted that the creditor’s argument for multiple filings failed because the original financing statement had lapsed four months after it became seriously misleading.  A continuation statement cannot revive a lapsed financing statement.  While the creditor argued that the subsequent filings of the continuation statements should have been enough to re-perfect the security interest, the bankruptcy court disagreed, pointing out that the UCC specifically provided that a continuation statement cannot substitute for a financing statement. As a result, the bankruptcy court declared that the creditor became an unsecured creditor at the time the security interests became unperfected. Because the creditor failed to re-perfect the security interest before the debtor filed for Chapter 11 bankruptcy, the debtor was not required to provide the creditor with adequate protection payments.

Conclusion

Bad survey and incorrect debtor’s name on a financing statement - carelessness led to legal issues.  These are “foot faults” that can (and should) be avoided.

March 24, 2024 in Bankruptcy, Civil Liabilities | Permalink | Comments (0)

Sunday, March 17, 2024

Kansas Prescribed Burning – Rules and Regulations

Overview

Prescribed burning of pastures is a critical component of rangeland management in the Great Plains. Burning is an effective, affordable means of reversing and controlling the negative effects of woody plant growth and its expansion that damages native grasslands. It also plays a role in limiting wildfire risk.  However, some landowners may be reluctant to engage in prescribed (controlled) burns out of a concern for liability and casualty risks associated with escaped fire and smoke. While some states in the Great Plains have “burn bans,” agricultural-related burns are typically not prohibited during such bans.

Regulations – The Kansas Approach

The states that comprise the Great Plains have regulations governing the conduct of prescribed burns. The regulations among the states have commonalities, but there are distinctions from state-to-state. Additionally, in some states, open burning bans can be imposed in the interest of public safety but exempt agricultural-related burns.

Kansas administrative regulations set forth the rules for conducting prescribed burns. K.A.R. §28-19-645 et seq. In general, open burning is prohibited unless an exception applies. K.A.R. §645.

One exception is for open burning of agricultural lands that is done in accordance with existing regulations. K.A.R. §28-19-647(a)(3). Under that exception, open burning of vegetation such as grass, woody species, crop residue, and other dry plant growth for the purpose of crop, range, pasture, wildlife or watershed management is exempt from the general prohibition on open burning. K.A.R. §28-19-648(a).

However, a prescribed burn of agricultural land must be conducted within certain guidelines. For instance, before a burn is started, the local fire control authority with jurisdiction in the area must be notified unless local government has specified that notification is not required. K.A.R. §28-19-648(a)(1). Also, the burn cannot create a traffic hazard. If wind conditions might result in smoke blowing toward a public roadway, notice must be given to the highway patrol, county sheriff, or local traffic officials before the burn is started. K.A.R. §28-19-648(a)(2). Likewise, a burn cannot create a visibility safety hazard for airplanes that use a nearby airport. K.A.R. §28-19-648(a)(3). If such a problem could potentially result, notice must be given to the airport officials before the burn begins. Id.

In all situations, the burn must be supervised until the fire is extinguished. K.A.R. §28-19-648(a)(4). Also, the Kansas burn regulations allow local jurisdictions to adopt more restrictive ordinance or resolutions governing prescribed burns of agricultural land. K.A.R. §28-19-648(b).

Kansas regulations also specify that the open burning of vegetation and wood waste, structures, or any other materials on any premises during the month of April is prohibited in the counties of Butler, Chase, Chautauqua, Cowley, Elk, Geary, Greenwood, Johnson, Lyon, Marion, Morris, Pottawatomie, Riley, Sedgwick, Wabaunsee, and Wyandotte counties. K.A.R. §28-19-645a(a).

However, certain activities are allowed in these counties during April such as the prescribed burning of agricultural land for the purposes of range or pasture management as well as the burning of Conservation Reserve Program (CRP) land that is conducted in accordance with the requirements for a prescribed burn of agricultural land. K.A.R. §28-19-645a(b)(1). Open burning during April is also allowed in these counties if it is carried out on a residential premise containing five or fewer dwelling units and incidental to the normal habitation of the dwelling units, unless prohibited by any local authority with jurisdiction over the premises. K.A.R. §28-19-645a(b)(2). Also, open burning is allowed for cooking or ceremonial purposes, on public or private lands regularly used for recreational purposes. Id.

Nonagricultural open burning activities must meet certain other requirements including a showing that the open burning is necessary, in the public interest, and not otherwise prohibit by any local government or fire authority. K.A.R. §28-19-647(b). These types of open burning activities must also be conducted pursuant to an approved written request to the Kansas Department of Health and Environment that details how the burn will be conducted, the parameters of the activity, and the location of public roadways within 1,000 feet as well as occupied dwelling within that same distance. K.A.R. §§28-19-647(d)(2)(E-F). The open burning of heavy oils, tires, tarpaper, and other heavy smoke-producing material is not permitted. K.A.R. §28-19-647(e)(2). A burn is not to be started at night (two hours before sunset until one hour after sunrise) and material is not to be added to a fire after two hours before sunset. A burn is not to be conducted during foggy conditions or when wind speed is less than five miles-per-hour or greater than 15 miles-per-hour. K.A.R. §§28-19-647(e)(3-5).

Legal Liability Principles

As noted above, Kansas regulations require that an agricultural prescribed burn is to be supervised until the fire is extinguished. But sometimes a fire will get out of control even after it is believed to be extinguished and burn an adjacent property resulting in property damage. How does the law sort out liability in such a situation?

Negligence. In general, as applied to agricultural burning activities, the law applies one of possible principles. One principle is that of negligence and the other is that of strict liability. The negligence system is a fault system. For a person to be deemed legally negligent, certain elements must exist. These elements can be thought of as links in a chain. Each condition must be present before a finding of negligence can be obtained. The is that of a legal duty giving rise to a standard of care. How is duty measured? 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 professional veterinarian in diagnosing or treating animals is what a reasonable and prudent veterinarian would have done under the circumstances, not what a reasonable and 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 example, assume that a Kansas rancher has followed all the rules to prepare for and conduct a prescribed pasture burn. After conducting the burn, the rancher banks the fire up and leaves it in what he thinks is a reasonably safe condition before heading to the house for lunch. Over lunch, the wind picks up and spreads the fire to an adjoining tract of real estate. If the burning of the neighbor’s property was not reasonably foreseeable, an action for negligence will likely not be successful; however, if the wind was at a high velocity before lunch and all adjoining property was extremely dry, it probably was foreseeable that the fire would escape and burn a neighboring landowner’s tract.

Note: For a plaintiff to prevail in a negligence-type tort case, the plaintiff bears the burden of proof to all of the elements by a preponderance of the evidence (just over 50 percent).

Intentional interference with real property. Another legal principle that can apply in open burning activities is intentional interference with real property. This principle is closely related to trespass. Trespass is the unlawful or unauthorized entry upon another person’s land that interferes with that person’s exclusive possession or ownership of the land. At its most basic level, an intentional trespass is the intrusion on another person's land without the owner's consent; however, many other types of physical invasions that cause injury to an owner's possessory rights abound in agriculture. These types of trespass include dynamite blasting, flooding with water or residue from oil and gas drilling operations, erection of an encroaching fence, unauthorized grazing of cattle, raising of crops and cutting timber on another’s land without authorization, and prescribed agricultural burning activities, among other things.

In general, the privilege of an owner or possessor of land to use the land and exploit its potential natural resources is only a qualified privilege. The owner or possessor must exercise reasonable care in conducting operations on the land to avoid injury to the possessory rights of neighboring landowners. For example, if a prescribed burn of a pasture results in heavy smoke passing onto an adjoining property accompanied with a long-term residual smoke odor, the party conducting the burn could be held legally responsible for damages under the theory of intentional interference with real property even if the burn was conducted in accordance with applicable state regulations. See, e.g., Ream v. Keen, 112 Ore. App. 197, 828 P.2d 1038 (1992), aff’d, 314 Ore. 370, 838 P.2d 1073 (Ore. 1992).

Strict liability. Some activities are deemed to be so dangerous that a showing of negligence is not required to obtain a recovery. Under a strict liability approach, the defendant is liable for injuries caused by the defendant's actions, even if the defendant was not negligent in any way or did not intend to injure the plaintiff. In general, those situations reserved for resolution under a strict liability approach involve those activities that are highly dangerous. When these activities are engaged in, the defendant must be prepared to pay for all resulting consequences, regardless of the legal fault.

Kansas liability rule for prescribed burning. A strict liability rule could apply to a prescribed burn of agricultural land if the activity were construed as an inherently (e.g., extremely) dangerous activity. In Kansas, however, farmers and ranchers have a right to set controlled fires on their property for agricultural purposes and will not be liable for damages resulting if the fire is set and managed with ordinary care and prudence, depending on the conditions present. See, e.g., Koger v. Ferrin, 23 Kan. App. 2d 47, 926 P.2d 680 (Kan. Ct. App. 1996). In Kansas, at least at the present time, the courts have determined that there is no compelling argument for imposing strict liability on a property owner for damages resulting from a prescribed burn of agricultural land. Id.

Note: The liability rule applied in Texas and Oklahoma is also negligence and not strict liability. In these states, carefully following applicable prescribed burning regulations goes a long way to defeating a lawsuit claiming that damages from a prescribed burn were the result of negligence.

Certainly, for prescribed burns of agricultural land in Kansas, the regulations applicable to nonagricultural burns establish a good roadmap for establishing that a burn was conducted in a nonnegligent manner. Following those requirements could prove valuable in protecting against a damage liability claim if the fire gets out of control and damages adjacent property.

Conclusion

Prescribed burning of agricultural land in Kansas and elsewhere in the Great Plains is an excellent range management tool. Practiced properly the ecological and economic benefits to the landowner can be substantial. But a burn must be conducted within the framework of existing regulations with an eye toward the legal rule governing any potential liability.

March 17, 2024 in Civil Liabilities, Regulatory Law | Permalink | Comments (0)

Monday, March 4, 2024

Farm Bankruptcy; Sovereign Immunity; Farm Lease and Pipeline Damages

Introduction

Farmers and ranchers face numerous legal issues on a regular basis.  The variety is vast from contract issues to income tax, estate and business planning, to real estate-related issues.  Other issues come up with water, criminal matters, and environmental law.  Then there are frequent issues with federal and state administrative agencies. 

With today’s article I look at some recent cases that illustrate issues with farm bankruptcy, sovereign immunity, farm lease law and damages from an alleged leaking pipeline.

A potpourri of legal issues facing farmers and ranchers – it’s the topic of today’s post.

Farm Bankruptcy

This first case from Kansas demonstrates that a Chapter 12 bankruptcy debtor must have a legitimate basis for seeking a modification of the Chapter 12 reorganization plan.  A mere hope in getting financing is not a change in circumstances that would justify reimposing the automatic stay (stopping creditors from acting).  The farm debtor must be able to put a feasible plan together for paying debts.  Here, the plan had been approved, but then the farm debtor couldn’t make the payments. 

Debtors Lacked Reasonable Likelihood of Putting Re-Tooled Chapter 12 Plan Together

In re Sis, No. 21-10123, 2024 Bankr. LEXIS 124 (Bankr. D. Kan. Jan. 18, 2024)

The debtors Chapter 12 plan was confirmed in early 2022, but the debtors soon had trouble making plan payments. They managed to make an annual payment to a creditor (bank) but failed to do so the next year.  The Chapter 12 trustee filed a motion to dismiss the case in late 2023, and another creditor filed a motion for relief from the automatic stay.   The debtors sought to re-impose the automatic stay to get more time to modify their Chapter 12 plan and make payments to a creditor to avoid the bank foreclosing on their farm.    The bankruptcy court denied the debtors’ motion.  The court noted the debtors’ genuine efforts to secure financing and sell assets but determined that the debtors had little likelihood of success in modifying their reorganization plan in a manner allowing them to make plan payments.  The court also determined that the debtors had not endured a substantial change in circumstances to support modifying their Chapter 12 plan.  The debtors merely had a hope of obtaining financing was not a change in circumstances.  As a result, the court denied the debtors’ motion for a temporary restraining order because the debtors had not shown a substantial likelihood of prevailing on the merits or any extraordinary circumstances that would justify reimposition of the automatic stay. In late 2023, the court dismissed the debtors’ Chapter 12 case.  Therefore, the court the court directed the debtors to either voluntarily dismiss the adversary proceeding or provide reasons why it should not be dismissed.  The court noted that failure to file a voluntary dismissal or a statement showing cause, within fourteen days of the court’s order in this case would result in the court dismissal of the case. 

Suing the Government – Sovereign Immunity

Recently, the U.S. Supreme Court noted the exception to the general rule that the federal government can’t be sued for damages. 

Fair Credit Reporting Act Waives Sovereign Immunity 

United States Department of Agriculture Rural Development Housing Service v. Kirtz, No. 22-

846, 2024 U.S. LEXIS 589 (U.S. Feb. 8, 2024)

 The defendant received a loan from the plaintiff, a division of the U.S. Department of Agriculture, which was repaid in full by mid-2018.  However, the USDA repeatedly informed a consumer credit reporting company that the defendant’s account was past due.  As a result, thedefendant’s credit score was damaged and his ability to secure future loans at affordable rates was threatened.  The defendant notified the company of the error and the company, in turn, notified the USDA.  However, the USDA did not correct its records and the defendant sued for either a negligent or willful violation on the Fair Credit Reporting Act (FCRA).  The USDA moved to dismiss the case based on sovereign immunity.  The trial court dismissed the case, the appellate court reversed on the basis that the Congress had amended the FCRA to authorize suits for damages against “any person” who violates the FCRA and that “person” includes any governmental agency.  The Supreme Court agreed to hear the case to clear up contrary conclusions reached by the Third, Seventh and D.C. Circuits (holding that the FCRA authorizes suits against government agencies) and the Fourth and Ninth Circuits (holding that the FCRA bars consumer suits against federal agencies). 

The Supreme Court noted that a U.S. is generally immune from suits seeking money damages unless the Congress waived that immunity by making a clear legislative statement.  Here, the Court unanimously determined that the FCRA clearly waived sovereign immunity by applying its provisions to persons who furnish information to consumer reporting agencies, and that no separate provision addressing sovereign immunity was required.  The Court also noted that its holding would not make the States susceptible to consumer suits for money damages because the FCRA was enacted pursuant to the Commerce Clause and, as such, does not give the Congress the power to abrogate state sovereign immunity.  

Farm Lease Law

The law governing farm leases differs from state-to-state.  The following case from Kansas makes a couple of points.  First, if the lease is in writing, the written terms control.  Second, when leased land is sold, the buyer takes the land subject to the existing lease.  Those are two key points that will apply in every state. 

Interpretation of Farm Lease at Issue

Cure Land, LLC v. Ihrig, No. 125,709, 2023 Kan. App. Unpub. LEXIS 479 (Kan. Ct. App. Dec. 1, 2023)

The parties entered into a cash farm lease for the calendar year 2020.  The lease specified that the defendant (tenant) was allowed to harvest any wheat crop planted in the fall of 2020 (or in the fall thereafter if the lease was renewed) by the following summer.  The lease also stated that the crops planted during the term of the lease was to be planted on a rotational basis rather than in a continuous crop fashion unless adequate moisture was present, and the landlord consented.  The lease also stated that continuous cropping was normal on the irrigated ground.  The lease renewed for 2021 and notice to terminate was given on August 27, 2021.  The ownership of the leased ground then changed hands, and the tenant notified the new landlord of the tenant’s intent to plant wheat on the irrigated ground and harvest it in 2022.  The prior owned informed the defendant that planting wheat was not permitted in the fall of 2021, as did the new owner a few days later.  In October of 2021, the defendant harvested corn from the irrigated ground while it was still “high moisture corn,” a practice the tenant had not previously engaged in and planted wheat the next day.  The defendant paid the 2021 lease obligation through the end of 2021 and paid the balance on June 22, 2022.  The plaintiff (the new landlord) sued for breach of contract and unjust enrichment.  The trial court ruled in favor of the new landlord, finding that the lease did not permit the defendant to plant fall 2021 wheat. The trial court interpreted the lease provisions, considering the distinction between wheat ground and irrigated ground, and concluded that the defendant’s interpretation would result in an unintended windfall. Additionally, the court found that the purchaser of the leased land had the right to enforce its terms.  The appellate court affirmed. 

The Proof and Computation of Property Damage

When you incur damage to your property being able to prove those damages and the amount of the loss is critical.  A recent case involving a pipeline under an Oklahoma ranch illustrates these principles.

Cattle Ranch’s Lawsuit Against Energy Company for Pipeline Leak Revived

Lazy S Ranch Properties, LLC v. Valero Terminaling & Distribution Co., No. 23-7001, 2024 U.S. App. LEXIS 3397 (10th Cir. Feb. 13, 2024)

The plaintiff, an Oklahoma cattle ranch noticed a diesel fuel odor coming from a cave.  The ranch hired experts to test the soil, surface water and groundwater for possible hydrocarbon contamination.  The tests found trace amounts of refined petroleum products.  The plaintiff sued the defendant energy company in late 2019 alleging claims of negligence, negligence per se, trespass, unjust enrichment, private nuisance and public nuisance.  The defendant moved for summary judgment on the basis that its pipeline carrying gasoline and diesel fuel beneath the ranch was not leaking and that the plaintiff failed to show any injury from the de minimis presence of hydrocarbons. 

The trial court analyzed the plaintiff’s various tort claims together which required a minimum level of contamination to be present so as to establish injury for each claim.  Ultimately, the trial court granted summary judgment to the defendant.  On appeal, the appellate court held that the trial court’s combining of the plaintiff’s tort claims under legal injury confused the analysis because “what constitutes a legal injury will be different based on the elements of each tort.”  On the two nuisance-based claims, the appellate court noted the plaintiff owners’ testimony that they discontinued their use of the land, in part, due to an odor that induced headaches, stopped water sales, and barred others from recreational activities on the ranch.  The appellate court viewed this as sufficient evidence to warrant trial on whether the defendant had committed a nuisance.  On the negligence issue, the appellate court determined that the plaintiff had presented sufficient evidence to create a genuine issue of material fact concerning legal injury and causation on the private and public nuisance as well as the negligence per se claim.  However, the appellate court affirmed the trial court on the plaintiff’s constructive fraud and trespass claims citing a lack of evidence that the defendant had any intent to commit a trespass or knew that its pipeline was leaking or overlooked the leak or failed to tell the plaintiff about a leak in the pipeline. 

March 4, 2024 in Bankruptcy, Civil Liabilities, Contracts, Real Property | Permalink | Comments (0)

Sunday, September 24, 2023

Hunting Use Agreements and Recreational Entrants – Legal Issues

Overview

A farm or ranch is a business much like any other.  Every day people may come to a farm to buy, sell, visit, hunt, fish, or to do any number of activities.  With respect to people coming on a farm or ranch to hunt, some do it by oral permission, but other landowners may take the step executing a written agreement to avoid misunderstandings and minimize future legal issues.  So, what are the elements of a good hunting use agreement? 

Building a solid hunting use agreement – it’s the topic of today’s post.

The Property Interest Involved

All wildlife, whether animal, fish, or fowl not privately owned belongs to the state.  See, e.g., Kan. Stat. Ann. §32-107.  But this does not allow hunters or fishermen to enter land at will and take what belongs to the state.  Outdoorsmen have no right to enter another person’s land to hunt or fish without first getting permission.  Doing so could subject the person to either a civil action for trespass; prosecution under a criminal trespass statute; or prosecution under an unlawful hunting statute. 

Note:  In Kansas (and most other states), licensed hunters are allowed to pursue wounded game upon the land of others without permission in order to capture the game.  But such persons must leave the premises upon the landowner’s request.  In these situations, the best approach for the landowner is to call the Sheriff and never personally try to force the trespasser off the land with threats of physical violence or at gunpoint. 

Engaging in a hunting activity on someone else’s property involves the property law concept 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.  Thus, a hunter who is on the premises with permission is a licensee.  The license can be terminated at any time by the person who created the license (the landowner) by denying permission to hunt.  A license is only a privilege. It is not an interest in the land itself and can be granted orally. 

As for a farm tenancy, without a specification in a written lease, the tenant has the right to hunt the leased ground.  The hunting rights follow the possession of the ground.  Thus, the landlord does not have a right to hunt the leased premises during the term of the lease unless the lease is in writing and the landlord reserves the right in the written lease.

Elements of a Hunting Use Agreement

When permission to hunt is obtained in writing, what makes for a good agreement?

Legal description and map.  It is essential to include a description of the property that the “hunting operator” may hunt.  Provide the number of acres and give a general description of the property, and then provide a precise legal description attached as an “Exhibit” to the agreement.  Also, it is generally a good idea to provide a map showing any areas where hunting is not allowed and attach the map as an Exhibit to the agreement. 

Hunting rights.  The agreement should clearly specify the rights of the hunting operator.  Because the agreement is a hunting use agreement, the document should clearly state that the “hunting operator” has the right to use the property solely for the purpose of hunting wild game that is specifically described in the agreement.  That specific game should not only be listed, but bag limits, species, sex, size and antler/horn limitations should be noted as appropriate. 

The agreement should also clearly specify whether the hunting operator’s right to use the property for hunting game are exclusive or non-exclusive.  If the hunting operator is granted an exclusive hunting right, the landowner is not entitled to use the property for game hunting purposes during the term of the agreement.  If the hunting operator’s right is non-exclusive, the landowner (and/or any designees) is entitled to use the property for game hunting purposes.  With non-exclusive rights, it may be desirable to denote any limitations to the landowner’s retained hunting rights. 

On the hunting rights issue, it is usually desirable on the landowner’s part to include a clause in the agreement specifying that the landowner and the landowner’s family, agents, employees, guests and assigns retain the right to use and control the property for all purposes.  Those purposes should be listed, with the common “including but not limited to” language.  Such uses as livestock grazing; growing crops and orchards; mineral exploration; drilling and mining; irrigation, timber harvesting; granting of easements and similar rights to third parties; fishing; horseback riding; hiking; and other recreational activities, etc., may want to be listed.

Specification of the beginning and ending date of the hunting operator’s right to use the property should be included.  It is suggested to denote that the property may be used for game hunting purposes limited to legal hunting seasons and hours tied to the particular wild game at issue.  The agreement should not extend the hunting operator’s rights beyond the applicable hunting season(s). 

Consideration.  What is a “fair” rate to charge for the granting of hunting rights?  The answer to that question will depend upon rates charged for similar properties and game in the area. That could be difficult to determine, but data might be available for comparison.  Check your state’s land grant university Extension Service for any information that might be available.  County Extension agents may be a good place to start.  

The agreement should describe how payment is to me made and when it is due.  In addition, give thought to including clause language noting that the landowner might have lien rights under state law and state whether a security deposit is required and/or security agreement is or has been executed to secure payment. 

Think through whether and to what extent (if any) payment is required if the property (or a part thereof) becomes unavailable to hunting because of unanticipated events such as flood; fire; government taking or condemnation; drilling, mining or logging operations, etc.  Is payment to be adjusted?  If so, how? 

Improvements.  Is the hunting operator to be given the right to construct improvements on the property?  If so, the right needs to be detailed.  Is the landowner obligated to construct any improvements?  For larger hunting operations the landowner commonly constructs certain improvements such as new roads; fences; gates; hunting camps; wildlife crops and feeding facilities; water facilities; blinds; tree stands, and similar structures.  List a completion date for constructed improvements.  Also, give thought to including a provision in the agreement for the cleaning, repair and maintenance of improvements.  Which party does what, and which party pays? 

Prohibited uses.   Clearly state what uses on the property are not allowed.  Are campfires allowed?  What about the use of dogs?  What about camping overnight on the property?  Are pack animals to be used?  If so, specify that the animals must be in compliance with any applicable branding or other identification requirements.  If pack animals are allowed, that might mean that corrals will be needed and feeding requirements will have to be met.  Also, with respect to pack animals, make sure the document requires that the hunting operator complies with inspection, inoculation, vaccine and health requirements.  The landowner should be provided with reports and certificates, etc. 

The driving of vehicles should be restricted to particular areas and if gates are to be driven through, include a provision requiring the hunting operator to be responsible for leaving the gates in the condition found (locked, unlocked, etc.). 

Insurance coverage.  An important aspect of any fee-based activity on the premises is insurance.  The agreement should specify whether which party (or both) is to maintain liability insurance coverage and in what amount.  Make sure the insurance covers any improvements on the property.  Also, for landowners, don’t rely on coverage under an existing comprehensive liability policy for the farm or ranch.  That policy likely has an exclusion for non-farm (or ranch) business pursuits of the insured. Being compensated for hunting on the property would likely fall within the exclusion. 

Miscellaneous.  There may be numerous miscellaneous provisions that might apply. These can include provisions for the landowner’s warranty of ownership; whether the agreement is to be recorded; and the maintenance of trade association memberships and licenses and permits. 

Liability Issues

Numerous states have enacted agritourism legislation designed to limit landowner liability to those persons engaging in an “agritourism activity.”  Typically, such legislation protects the landowner (commonly defined as a “person who is engaged in the business of farming or ranching and 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.  The statutes tend to be written very broadly and can apply to such things as corn mazes, hayrides and even hunting and fishing activities.

Recognizing the potential liability of owners and occupiers of real estate for injuries that occur to others using their land under the common law rules, the Council of State Governments in 1965 proposed the adoption of a Model Act to limit an owner or occupier's liability for injury occurring on the owner's property. The Council noted that if private owners were willing to make their land available to the general public without charge, every reasonable encouragement should be given to them. The stated purpose of the Model Act was to encourage owners to make land and water areas available to the public for recreational purposes by limiting their liability toward persons who enter the property for such purposes. Liability protection was extended to holders of a fee ownership interest, tenants, lessees, occupants, and persons in control of the premises.  Land which receives the benefit of the act include roads, waters, water courses, private ways and buildings, structures and machinery or equipment when attached to the realty. Recreational activities within the purview of the act include hunting, fishing, swimming, boating, camping, picnicking, hiking, pleasure driving, nature study, water skiing, water sports, and viewing or enjoying historical, archeological, scenic or scientific sites.  Most states have enacted some version of the 1965 Model legislation.

Note:  The point is to check state law with respect to both agritourism statutes and recreational use statues.  Generally, they will provide liability protections to the landowner for hunting activities on the premises if the landowner does not act willfully or wantonly (with reckless disregard to the safety of the hunting operator).  State laws vary on the protection of the statutes if a fee is charged.  Also, it is a good idea to check with an insurance agent to see if coverage is extended if you charge a fee for hunting.  The statutes don’t remove the possibility of a suit being brought and the landowner being required to defend.  Instead, a recreational use statute is typically used as an affirmative defense. 

Conclusion

Allowing hunting activities to be engaged in on farming or ranching property can provide an additional source of income.  But it’s important to enter into properly drafted written agreements with hunters (and others on the premises for recreational purposes) and ensure that appropriate insurance coverage applies. 

September 24, 2023 in Civil Liabilities, Real Property | Permalink | Comments (0)

Sunday, September 3, 2023

Kansas Court of Appeals Decides Major Hog Nuisance Case

Overview

A recent opinion by the Kansas Court of Appeals provides a thorough explanation of property rights with respect to road ditch rights-of-way, as well as the common law of trespass and nuisance in addition to the Kansas Right-to-Farm law.  The case involved what is perhaps the most egregious ag nuisance case that has ever gone to an appellate-level court in Kansas.  The case is Ross et al. v. Nelson, et al., No. 125,274, 2023 Kan. App. LEXIS 32 (Kan. Ct. App. Aug. 25, 2023).

Of trespass, nuisance and right-to-farm laws – it’s the topic of today’s post.

Background Facts

The defendant (Nelson) owns multiple farming operations and installed about 2 miles of pipeline in the road ditch right-of-way next to a public road to transport liquified hog waste to spread on his crop fields.  He installed the three underground pipes (two to carry water to his hog operation and one to carry the effluent) without the consent of the adjacent landowners (the plaintiffs).  He also did not follow the applicable county permitting process.  The defendant’s daughter-in-law later filled-out a permit application and paid the fee for installing the pipes but neither the county clerk nor Road and Bridge Supervisor ever signed the permit application.  The defendant also created an impression with the County Commissioners that he had the permission of the landowners adjacent to the roadway where he was wanting to install pipes.  The County Attorney advised the Commissioners that the adjacent landowners had to consent before the application could be approved.  But the fact remained that the Commission never granted approval to install the pipes and the County Attorney called the Sheriff who temporarily stopped the installation process.  However, the defendant later completed the installation. The Sheriff also contacted the Kansas Department of Health and Environment (KDHE), but the KDHE explained that it does not oversee piping installation between hog operations and disposal sites.  The KDHE regulates the disposal of hog waste.

Note:  The defendant consistently maintained that he didn’t need permission to install the pipes in the road ditch right-of-way.  He also lobbied the county commissioners and the state legislature for express authority to lay the pipelines.  His lobbying efforts were not successful. 

Once installed, the pipes ran for a mile along each of the plaintiffs’ road frontages.  The liquified hog manure was sprayed from a pivot irrigation system (and end gun) near a home of one of the plaintiffs.  The plaintiffs, also farmers, sued for trespass and nuisance. 

The spray from the pivot came within 200 feet of one of the plaintiffs’ homes.  As noted, neither of the plaintiffs gave permission to the defendant to lay pipes in the road right-of-way, and the defendant choose not to dispose of the hog waste on other land that he owned where no one lived nearby. 

In the Spring of 2019, the waste was pumped through the pipelines and effluent was sprayed on the field.  The plaintiffs filed a report with the Sheriff concerning the odor.  The report noted that hog waste mist would drift onto the plaintiffs’ property and sprayed one of the plaintiffs personally as well as their home which then became covered in flies.  The wife of one of the plaintiff couples moved to their Nebraska home.   One of the plaintiffs had planned to sell their farmland to one of their tenants, but the sale fell through because of the odor.

Trial Court

The plaintiffs sued for trespass and nuisance.  The trial court ruled for the plaintiffs on both issues.  On the trespass issue, the trial court noted that the defendant did not have a public purpose for installing pipes in the road right-of-way and he didn’t have permission – either from the landowners, the county or the legislature.   

The trial court also ruled for the plaintiffs on the nuisance issue.  The Kansas Right-to-Farm law didn’t apply to authorize the defendant’s conduct because the nuisance was the result of the defendant’s trespass. 

The trial court also added a claim for punitive damages. 

The jury returned a verdict of $126,720 in property damages for the plaintiffs, plus $2,000 in nuisance damages plus $50,000 of punitive damages. 

The defendant appealed.

Appellate Court

The appellate court affirmed and in doing so made some important points relevant to all farming operations.

Use of road ditch right-of-way.  The appellate court pointed out that a road ditch right-of-way cannot be used for private purposes without first securing the adjacent landowners’ permission or otherwise receiving local or legislative authority.  The right-of-way is owned by the adjacent property owners.  The public has an easement to use the roadway for travel, that’s it.  Shawnee County Commissioners v. Beckwith, 10 Kan. 603 (1873).  The ownership of the land and “everything connected with the land over which the road is laid out” does not pass to the public but remains with the owner of the underlying (and adjacent) land.  Id.  While the defendant lobbied the legislature for a change in the law on this point, the bill died in committee.  Thus, the defendant’s laying of the pipes in the road ditch right-of-way was a trespass. 

The appellate court specifically noted that “fee owners of real property containing a public roadway have a possessory right to use, control, and exclude others from the land, as long as they do not interfere with the public’s use of the road.  In contrast, the public has an easement over the property to use the road for transportation purposes…but not other rights beyond those purposes.  Any further use by member of the public may be authorized through state action, provided the landowner is compensated for the diminished property rights, or through the landowner’s consent.”  The scope of the public’s easement in a road ditch right-of-way, the court noted, must be for a public purpose.  Any private use must be merely incidental to the public purpose.  Stauber v. City of Elwood, 3 Kan. App. 2d 341, 594 P.2d 1115, rev. den. 226 Kan. 793 (1979). 

Because the defendant was using the road ditch right-of-way solely for his private purposes, he had no right to lay the pipelines without permission or official government authority.  He had neither.  The appellate court pointed out that it was immaterial that the pipelines didn’t interfere with public travel.  The appellate court also rejected as absurd and with no support in Kansas law the defendant’s argument that supplying pork for ultimate public consumption constituted a public purpose.  Consequently, the appellate court upheld the trial court’s determination that the defendant had committed a trespass.

Nuisance and right-to-farm.  The appellate court also upheld the trial court’s consideration of the nuisance claim and the resulting jury award for the plaintiffs on the nuisance claim.  The general legal principle underlying the doctrine of nuisance is that property must be used in such a manner that it does not injure that of others.  See, e.g., Wilburn v. Boeing Airplane Co., 188 Kan. 722, 366 P.2d 246 (1961).  However, there is a limitation placed on nuisance laws.  Many states, including Kansas, have adopted what are know as a “right-to-farm” law.  Such a law limits the extent to which a farm operation may be considered to be a nuisance.  Under the Kansas right-to-farm law, if a farming operation is conducted according to good agricultural practices and was established before surrounding nonfarming activities, the courts must presume that there is no nuisance.  Kan. Stat. Ann. §2-3202(a).  An activity is a good agricultural practice if it “is undertaken in conformity with federal, state, and local laws and rules and regulations.”  Kan. Stat. Ann. §2-3202(b). 

The defendant claimed that the Kansas right-to-farm law protected his fertilization practices from nuisance claims and that there was no evidence submitted at trial to support the jury’s finding that spraying the effluent as fertilizer was a nuisance. 

The appellate court noted that neither party raised on appeal whether the defendant’s activity predated the plaintiffs’ residing nearby.  Thus, the appellate court presumed that the right-to-farm law could apply to protect the defendant’s activity.  The appellate court also did not address the fact that the plaintiffs were also farmers.  It has been held in a district court case in Kansas that the Kansas right-to-farm provisions do not apply to disputes between farmers, since the law is designed to protect farmers only from nuisance claims brought by nonfarmers. 

The defendant’s basic argument was that his manure spreading activity was protected by the right-to-farm law because he was in compliance with all federal and state and local laws rules and regulations.  This was in spite of him already found to have committed a trespass which allowed him to engage in the activity that gave rise to the nuisance claim.  The defendant (and amici) tried to finesse this hurdle by asserting that the common law of trespass was not part of state law.  The appellate court concluded that this was another of the defendant’s absurd arguments and rejected it.  The appellate court determined that the nuisance was the result of a trespass (a violation of state law) and was not protected. 

Punitive damages.  The appellate court also upheld the trial court’s assessment of punitive damages against the defendant.  While an award of punitive damages is a relatively rare occurrence, it will be assessed where the court determines that the evidence warrants it based on the defendant’s particularly bad conduct.  Here, the appellate court determined that witness testimony was persuasive – the wife of one of the plaintiff couples hadn’t stayed at the home for a year; the plaintiffs couldn’t host guests at their home because of the hog odor; a plaintiff’s house was covered with the effluent mist and coated with flies; there was a lingering stench both outside and inside a plaintiff’s home; spray drifted onto one of the plaintiffs; and after the lawsuit was filed, the defendant sprayed twice as much fertilizer as he had the prior year.  The defendant also piled truckloads of manure across from one of the plaintiffs’ homes for several days straight.  The appellate court concluded that this was clearly “willful” and “reprehensible” conduct that warranted imposing punitive damages. 

The defendant claimed that the punitive damage award should be set aside due to “instructional error.”  He claimed that the jury verdict form was unclear as to whether the punitive damages were for trespass or for nuisance.  But his attorney failed to object to the verdict form and the appellate court determined that the form was not clearly erroneous. 

Conclusion

The appellate court’s opinion is thorough and well thought-out.  It is a “win” for property rights in upholding an adjacent owner’s rights in road ditch rights-of-way and noting that the protections of the right-to-farm law is limited to situations where the farming operation accused of committing a nuisance is in compliance with state law – all of it, including state common law. 

The appellate court began its opinion by stating that the case arose “at the intersection of property rights, public roadways and the Kansas Right to Farm Act.”  Unfortunately, the path that led to that intersection was lined with arrogance, greed and a lust for power. 

September 3, 2023 in Civil Liabilities | Permalink | Comments (0)

Sunday, August 27, 2023

Ag Law and Tax Ramblings

Overview

The subject matter of agricultural law and taxation is very dynamic.  Farmers, ranchers and agribusiness ventures can find themselves involved in legal and tax issues in many ways.  Let’s take a look at a few of those issues.

Random thoughts and developments in ag law and tax – it’s the topic of today’s post.

Crop Insurance Deferral

Farmers facing drought this year will likely collect crop insurance.  The tax law allows crop insurance proceeds to be deferred if the farmer has a business practice of deferring crop sales.  But there’s a limitation on the amount that can be deferred.  The amount that you can defer is limited to the portion related to crop damage.  The portion associated with price is not deferrable.  Crop damage is based on yield loss times the crop’s base price before you plant the crop.  If the price at harvest equals or is greater than the base price, all of your crop insurance proceeds are related to yield and will be fully deferable. 

However, if harvest price is lower than the base price, the portion of the crop insurance proceeds related to the drop in price is based solely on the price drop.  That means that at least some of the crop insurance proceeds won’t be deferable. 

Note:  I have a formula in my treatise, Principles of Agricultural Law, with examples of the computation.  Note that the formula is not official IRS policy, but the IRS in Pub. 225 does recognize the principal of the formula.

The good news is that you won’t have to calculate the numbers.  Your crop insurance provider usually reports the amount of price and yield loss when the proceeds are sent out.

This year, it’s looking likely that most crop insurance proceeds will be a result of a price drop and not a price increase at harvest.  So don’t be surprised if you won’t be able to defer all of your crop insurance proceeds.  Keep that in mind as you start to think about tax planning coming into the last quarter of 2023.

Tax Legislation

The Tax Cuts and Jobs Act (TCJA) enacted in late 2017 contains numerous provisions that will expire at the end of 2025.  Farmer and ranchers and tax preparers are beginning to raise questions with me about how I see the tax landscape shaping up come 2026.  For starters, I think it’s unlikely that the Congress will act on major tax policy until it has too.  That would mean that we won’t see tax legislation until late in 2025.  However, the Congress has a habit of passing Omnibus spending legislation late in the year and tax provisions could be thrown in that bill this coming December.  If that happens, what might be addressed later this year?  I see one possibility being that of bonus depreciation being reinstated to 100 percent, perhaps on a retroactive basis.  It’s currently 80 percent and is phasing down.  Also, I have heard rumblings about making the qualified business income deduction (20 percent for sole proprietorships and pass-through income) permanent.  There might also be another attempt to increase the Child Tax Credit.

As for what might happen in 2025, it will depend on the politics at that time and general economic conditions.  One thing is for sure, the higher interest rate on the debt (caused by bad economic policies) is causing the government to spend much more on debt service and will make tax reform to help the economy more difficult.

Trains and Crossings

An issue for all motorists, but one of particular interest to motorists using rural roadways is the length of time that a train can block a crossing. 

Many states have statutes that specify the maximum length of time that a train can block a public road.  The state laws vary, but a general rule of thumb is that a blockage cannot exist for more than 20 minutes.  There are numerous exceptions concerning such things as emergencies and when the blockage is a result of something beyond the railroad’s control.  When state law doesn’t address the issue, there may be restrictions at the local level.

An interesting question involves the extent to which state laws on road blockages are valid.  Railroads are subject to an interesting mix of federal and state law.  Does federal law preempt state law on this issue?  It can if state law only applies to railroad companies rather than the public at large and has more than just a remote or incidental effect on railway transportation.  That’s because the Surface Transportation Board has exclusive jurisdiction to regulate railways. 

This all means that state law must be carefully tailored to apply broadly to roadway obstructions generally, and not have anything more than a slight impact on railway transportation.  If those requirements are not satisfied, federal law may control.

What’s a Tractor?

A recent case (Brownell v. Brownell, No. SCSC024547 (Dist. Ct. Fayette Co, IA (Aug. 16, 2023)) involved a father suing his son over the sale of a tractor.  The father bought a tractor to use in his farming operation.  It was equipped with a cab, three-point hitch, draw bar and PTO shaft – all of which were detachable.  During his high school years, the son used the tractor in tractor pulls, which required the removal of the detachable parts.  Dad continued to pay for the fuel for the tractor and kept it insured.  Mom and Dad then divorced and as part of the divorce Dad discussed selling the tractor to their son.  No formal written sale contract was entered into, but Dad told his attorney that he had agreed to sell the tractor to his son for $10,000 with no weights or other items, noting that a bank had a lien on all farm equipment. 

The son paid $10,000 to his parents and when he took delivery of the tractor, he also took the draw bar, three-point hitch and PTO shaft.  The legal question was whether the attachments counted as the “tractor” entitling the son to them.  While the attachments were extraneous to the oral contract, the court said the son reasonably believed that they came with the tractor and were a part of it.

It’s always a good idea to get contracts in writing – even seemingly simples ones, and even ones between family members.  It’s hard for me to fathom a father suing his son, but I have seen it happen numerous times.

Also, this case reminds me of a Kansas case about 25 years ago involving a new combine that caught fire during its first usage when the engine malfunctioned.  While the insurance company made the farmer whole, the company claimed in court that it only insured the shell of the combine and not the component parts (i.e., the engine) so the engine manufacturer should be on the hook for the loss.  The court disagreed.  A “combine” meant all of the component parts of the combine.  That’s what a reasonable insured would think with respect to a self-propelled combine. 

Renting Out Part of the Home

If you rent out part of your home, be careful in how you account for the income.  You will need to do an allocation for the expenses and the basis of the portion of the home rented out.  For instance, in Lin v. Comr., T.C. Memo. 2023-37, a married couple rented out a basement apartment in their home to a friend.  They charged $300/month (the Tax Court ignored the issues that the rent might have been below fair rental value) and deducted expenses associated with the rental on their Schedule E.  They also claim depreciation but in doing so used their basis in the entire house.  The Tax Court determined that the expenses should have been allocated to the space rented and that some of the expenses didn’t pertain to the rented portion of the home.  For example, expenses incurred to renovate the bathroom were incurred after the tenant moved out and there was no evidence provided that they had ever rented the space before or would do so in the future.  On the depreciation issue, the Tax Court held that the rental income was only offset by the basis in the rented space and that the couple didn’t supply any square footage numbers on which to allocate depreciation (or the other expenses) attributable to the rented portion of the home.  The IRS did allow some expense deductions, and the Tax Court allowed those. 

August 27, 2023 in Civil Liabilities, Contracts, Income Tax | Permalink | Comments (0)

Wednesday, July 12, 2023

Recent Happening in Ag Law and the Courts

Overview

The field of agricultural law is broad and dynamic.  There is always something happening.  That’s a function of the many varied ways that the law intersects with land ownership, land use, economics and the production of food and fiber.  Below is my commentary on a few recent cases involving farmers and ranchers – farm bankruptcy; veterinarian’s lien; confined animal feeding operations and an injury sustained while assisting a downed heifer.

Some recent court cases involving ag – it’s the topic of today’s post.

Chapter 12 Plan Could Be Modified – Substantial Change in Circumstances Must be Shown

In re Swackhammer, 650 B.R. 914 (Bankr. S.D. Iowa 2023)

Chapter 12 bankruptcy is exclusively for family farmers.  A creature of the farm crisis of the 1980s, it became a permanent part of the bankruptcy code in 2005.  A key feature is the ability to restructure debt and put together a reorganization plan that allows the farm debtor to pay off creditors over time.  But a significant question is whether that reorganization plan can be modified and, if so, how many times it can be modified.  A recent case shed some light on those questions. 

In Swackhammer, the debtors filed Chapter 12 bankruptcy in 2018, and a second modified plan was confirmed in 2019.  In 2020, the debtors move to modify their confirmed plan to extend the time to make payments to secured creditors based on changed circumstances such as weather, equipment failure, employee illness or losses due to delayed financing.  Each time the creditors objected, but each time the court allowed the modification.  In 2022, the debtors motioned to approve a third modified plan to extend the deadline for payments to creditors because of unforeseen revenue loss from the 2021 crops.  The debtors, for the first time, claimed that nothing in 11 U.S.C. §1229 required them to prove changed circumstances.  The creditors objected, claiming that the court had plenty of evidence that none of the debtors’ plans were feasible.  The creditors also asserted that the debtors had to prove that their revenue loss was due to a substantial and unanticipated change in circumstances.  The creditors motioned to dismiss the debtors’ Chapter 12 case. 

The bankruptcy court directed the parties to discuss whether they could agree to the terms of a fourth modified plan.  Ultimately, a fourth modified plan was approved with the bankruptcy court noting that this would be the last modification allowed.  A secured creditor appealed on the basis that 11 U.S.C. §1229 required a debtor to show “unanticipated, substantial change in circumstances” before confirming a proposed modified plan.  The appellate court noted that the circuit courts of appeal were split on the issue and that it had not yet addressed the issue.  The appellate court held that 11 U.S.C. §1229(a) requires a showing, at a minimum of a “substantial change in circumstances” but that it didn’t need to take a position on the issue in the case because the evidence illustrated that the debtors had met the burden.  Accordingly, the bankruptcy court had not erred in allowing the fourth modification because, in any event, the evidence showed an unanticipated substantial change in circumstances. 

Veterinarian’s Lien Fails for Lack of Proof. 

In re Kern, No. 22-40437-12, 2023 Bankr. LEXIS 1392 (Bankr. D. Kan. May 26, 2023)

Every state has numerous statutory liens that, when properly “perfected” can beat out a prior perfected secured lien.  Common ones include a mechanic’s lien, an agister’s lien, and a landlord’s lien.  Some states, including Kansas, also have a statutory veterinarian’s lien.  That lien was at issue in a recent case.

In In re Kern, the debtor had pastured cattle for third parties until February of 2022.  During that time, a veterinarian provided medications and veterinary care for the cattle.  After shipping the cattle at the direction of the owner, the third party’s check was dishonored, and the debtor couldn’t pay the veterinary bill.  Ultimately, the veterinarian came into possession of some of the debtor’s cattle and the veterinarian cared for the cattle for slightly over two months.  It was unclear and disputed how the veterinarian came into possession of the cattle.  The veterinarian filed a veterinary lien under Kan. Stat. Ann. §47-836 with the local county Register of Deeds and a copy of the lien from mailed to the debtor and printed in the local newspaper.  The debtor’s primary lender then intervened, claiming a first-priority lien on the cattle.  The county Sheriff sold the cattle for $18,714.83.  That amount was deposited with the county court. 

The veterinarian then sought payment pursuant to the lien, and the primary lender objected.  The debtor then filed Chapter 12 bankruptcy.  The parties stipulated that the primary lender held a valid perfected lien in the cattle and cattle proceeds, that could be beat out by a valid veterinarian’s lien.  The debtor claimed that he didn’t request veterinary services for the cattle, but that the cattle owner must have.  Ultimately, the court concluded that the veterinarian could only establish that someone with lawful possession of the cattle delivered them to him for veterinary services, but that it couldn’t be established that it was the debtor.  Thus, the veterinarian couldn’t establish it was the debtor that requested his services and the veterinarian failed to meet his burden of proof by a preponderance of the evidence and the veterinarian’s lien was invalid. 

Court Vacates Medium-Sized CAFO Rule

Dakota Rural Action v. United States Department of Agriculture, No. 18-2852 (CKK), 2023 U.S. Dist. LEXIS 58678 (D. D.C. Apr. 4, 2023)

The plaintiff, a non-profit organization that was initially formed during the farm debt crisis of the 1980s to provide various forms of assistance to smaller-sized family farming operations, acting on behalf of various farm and animal rights groups, challenged a rule promulgated by the Farm Service Agency (FSA) in 2016.  That rule exempted medium-sized confined animal farming operations (CAFOs) from environmental review for FSA loans.  A medium-sized CAFO can house up to 700 dairy cows, 2,500 55-pound hogs or up to 125,000 chickens.  The plaintiff challenged the rule as being implemented without complying with the National Environmental Policy Act (NEPA) [42 U.S.C. §4332(2)(C)] which requires all federal agencies to undertake a certain degree of environmental review before effecting an agency decision or policy.  In addition, the NEPA specifies that “an agency will inform the public that it has indeed considered environmental concerns in its decision-making process.”  Alternative, an agency can provide an environmental impact statement (EIS).  An EIS requires agency review before any action is taken that will “significantly affect the quality of the human environment.”  Another alternative is for an agency to prepare an “environmental assessment” (EA) when environmental impact is not clearly established, an EIS is not necessary and there will not be any significant environmental impact.  But, no analysis need be made public is the agency determines that its proposed action will not individually or cumulatively have a significant effect on the human environment.  The FSA concluded that it didn’t need to do any environmental analysis before making loans to medium-sized CAFOs, categorically exempting them from NEPA review.  The court disagreed and vacated the rule.  The court noted that FSA had provided no rationale for the exemption or the data upon which it relied except a 2013 discussion of a proposed categorical exemption.  FSA conceded that it made no finding as to environmental impact.  The court determined that to be fatal, along with providing no notice that it was going to categorically exempt all loan actions to medium-sized CAFOs.  Thus, the rule was procedurally defective.  The court vacated the rule and remanded to the FSA. 

Domesticated Animal Activity Act Doesn’t Provide Immunity for Feedlot Operator

Vreeman v. Jansma, No. 22-1365, 2023 Iowa App. LEXIS 492 (Iowa Ct. App. Jun. 21, 2023)

The defendant operated a feedlot and discovered a downed heifer in an area where he couldn’t get tractor or equipment to assist the heifer in getting up.  He called the plaintiff to come and help him with the task, something the plaintiff has assisted with in the past.  While trying to get the heifer to her feet, the plaintiff’s leg was severely injured.  The plaintiff sued for negligence and the defendant motioned for summary judgment, citing the Iowa Domesticated Animal Activity Act (Iowa Code Ch. 673) (Act) as providing him with immunity from suit.  The Act states that “A person, including a domesticated animal professional, domesticated animal activity sponsor, the owner of the domesticated animal, or a person exhibiting the domesticated animal, is not liable for the damages, injury or death suffered by a participant or spectator resulting from the inherent risks of a domesticated animal activity.”  The plaintiff asserted that the Act was inapplicable because standing up a downed heifer is not a “domesticated animal activity.”  The trial court granted summary judgment to the defendant and the plaintiff appealed.  The appellate court reversed, noting that the statute provided a specific list of definitions for “domesticated animal activity” and that standing up a downed heifer was not in the list. 

Conclusion

There’s never a dull moment in agricultural law and taxation.  Stay tuned for more developments in future posts.

July 12, 2023 in Bankruptcy, Civil Liabilities, Regulatory Law, Secured Transactions | Permalink | Comments (0)

Saturday, July 8, 2023

Coeur d’ Alene, Idaho, Conference – Twin Track

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

Speakers

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

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

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

The speakers for the ag law track are as follows:

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

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

Who Should Attend

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

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

Sponsorship

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

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

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

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

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

Sunday, June 18, 2023

Sunday Afternoon Random Thoughts on Ag Law and Tax

Overview

I am in the midst of a 10-day traveling and speaking “tour” and have a moment to share a few thoughts of what has been rolling around in my mind (besides what I have been teaching recently).  Some of these thoughts are triggered by questions that I receive, others by cases that I read, yet still others simply from conversations that I have had with other recently.  Those thoughts include liability for guests on the farm; the usefulness of Health Savings Accounts; pre-paid farm expenses and death; putting a plan in place to address long-term health care costs; and custom agreements for direct beef sales from the farm.

Random thoughts in ag law and tax – it’s the topic of today’s blog article.

Direct Beef Sales and Custom Agreements

It seems that the interest in buying beef products directly from cattle producers is on the rise. But direct sales/purchases may trigger some different rules.  In general, if a person wants to buy beef directly from a cattle producer the law treats the transaction differently depending on whether the live animal is sold to the buyer or whether processed beef is sold.  The matter turns on whether the animal owner is the end consumer.  If the cattle producer sells processed beef to the buyer, the processing of the animal must occur in an inspected facility and the producer would also be subject licensing, labeling and insurance requirements.  But if the producer sells the live animal to the buyer then the producer can also do the processing and sell any remaining beef not initially purchased to another buyer.    

This means that a contract should clearly state that the live animal is being sold and in what percentage.  If a specific animal is sold, the animal should be identified.  Also, the calculation of the price should be detailed and how payment is to be made.  Any processing fees should be set forth and the agreement should be clear that the meat can’t be resold or donated.  In addition, it is important to make sure to clearly state when the animal is the buyer’s property.  The key point is that the owner of the animal and the consumer of the beef must be the same. 

The bottom line is to have a good custom harvest agreement to be able to use the custom exempt processing option. 

Handling Long-Term Care Costs

Planning for long-term care costs should be an element of a complete estate plan for many farm and ranch families.  Having a plan can help minimize the risk that the farm assets or land would have to be sold to come up with the funds to pay a long-term care bill.  What are some steps you can take to put a plan in place that will protect the farm assets from being sold to pay a long-term health care bill? 

A ballpark range of the monthly cost of long-term care is $7,000-9,000 in many parts of the country.  If you are planning on covering that expense with Medicaid benefits keep in mind that you can only have very little income and assets to be eligible. 

A good place to start is to estimate your current monthly income sources.  What do you have in rents, royalties, Social Security benefits, investment income, and other income?  You will only need to plug the shortfall between the monthly care cost and your then current monthly income sources.  That difference might be able to be made up with long-term care insurance.  Those policies can differ substantially, so do your homework and examine the terms and conditions closely.    

If a policy can be obtained to cover at least the deficiency that income doesn’t cover, all of the farm assets will be protected. Many insurance agents and financial advisors can provide estimates for policies and help you determine the type of policy that might be best for you. 

When should you be thinking about putting a plan together?  Certainly, before a major medical problem occurs.  If you are in relatively good health, policy premiums will be less.  Certainly, before age 70 would be an excellent time to employ a plan.

Planning to protect assets from depletion paying for long-term health care costs is beset with a complex maize of federal and state rules.  Make sure you get good guidance. 

Pre-Paid Farm Expenses and Death

Many cash-basis farmers pre-pay next-year’s input expenses in the current year and deduct the expense against current year income.  The IRS has specific rules for pre-paying and deducting.  Another issue with pre-paid inputs is what happens if a farmer claims the deduction and then dies before using the inputs that were purchased? 

To be able currently deduct farm inputs that will be used in the next year, three requirements must be met.  The items must be purchased under a binding contract for the purchase of specific goods of a minimum quantity; the pre-purchase must have a business purpose or not be entered into solely for tax avoidance purposes; and the transaction must not materially distort income. 

If the rules are satisfied but the farmer dies before using the inputs that were purchased, what happens?  In Estate of Backemeyer v. Comr., 147 T.C. 526 (2016), a farmer pre-purchased about $235,000 worth of inputs associated with the planting of next year’s crop.  The deduction was taken on the return for the year of purchase, but the farmer died before using the inputs.  The inputs passed to his widow who used them to put the crop in the ground.  She deducted the inputs again on the return for that year.  The IRS objected, but the court said that’s the way the tax rules work.  The value of the inputs was included in his estate, and she could claim a deduction against their cost basis – the fair market value at the time of his death.

Liability for Guests on the Farm

What’s your liability for guests on the farm?  The answer is, “it depends.”  Facts of each situation are paramount, and the outcome of each potential liability event will turn on those facts. For example, in Jones v. Wright, 677 S.W.3d 444 (Tex. Ct. App. 2023), a family who came to the plaintiffs’ property to look at a display of Christmas lights sued the landowner for the death of their child who was killed by a motorist while crossing the road after leaving the premises. 

When they left the property, their minor child was struck and killed by a vehicle while crossing the road to get to the family’s vehicle. The family sued the landowners for wrongful death and negligence claiming that they were owed a duty of care as invitees that was breached by the landowners’ failure to make the premises safe or warn of a dangerous condition.

The court disagreed based on several key factors.  The landowners didn’t charge a fee for viewing the lights; the vehicle that struck the child was being driven at night without lights; there hadn’t been any similar prior accidents on the road; the landowners used loudspeakers to tell visitors not to park on the opposite side of the road; and the accident occurred on property the landowners didn’t own.  Based on those facts, the court said the landowners didn’t breach any duty that was owed to the family.  The child’s death was not a foreseeable risk. 

But slightly different facts could have led to a different outcome.

Health Savings Accounts

One of the best-kept secrets of funding medical costs is a Health Savings Account (HSA).  Surveys indicate that a self-employed farmer pays about $12,000-$15,000 annually for health insurance.  To make matters worse, the policies often come with high deductibles and limited coverage.  An HSA can provide current and future income tax benefits while simultaneously allowing the self-funding of future medical costs. 

An issue for many is that it’s unlikely that medical expenses are deductible for failure to meet the threshold for itemizing deductions.  That threshold is only likely to be met in a year when substantial medical costs are incurred.  An HSA is an option without the deduction restrictions, but it does need to be paired with a high deductible insurance policy.

With an HSA, contributions are deductible up to $7,750 this year for a family, earnings grow tax-free, and distributions to pay for qualified medical expenses are also not taxed. Qualified expenses include Medicare premiums, or any other qualified medical expenses incurred before retirement.  If you’re a farmer that files a Schedule F, an HSA is the simplest and most cost-effective way to receive a deduction for medical costs. 

But you can’t contribute to an HSA once you are enrolled in Medicare. So, it might be a good idea to fully fund an HSA but not take any distributions until retirement.  One downside with an HSA is that if it is inherited, the recipient has one year to cash it in.  If there aren’t any qualified expenses to be reimbursed, income tax will result.

Conclusion

Just some random thoughts this Sunday afternoon.  For you father’s reading this, I trust you have had a very pleasant Father’s Day.  Now it’s time to get some rest for an early morning flight to Georgia.

June 18, 2023 in Civil Liabilities, Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)