Agricultural Law and Taxation Blog

Principles of Agricultural Law

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 47^th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; lawyers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous and can lead to unnecessary litigation. What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed? Is a liability release form necessary?  Is it valid?  What happens when a contract breach occurs?  What is the remedy? 

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  What about dealing with an ag cooperative and the issue of liens?  What are the priority rules with respect to the various types of liens that a farmer might have to deal with? 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.  That’s especially true with the unsettled issue of whether Payment Protection Program (PPP) funds can be utilized by a farmer in bankruptcy.  The courts are split on that issue.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation as well as help minimize the bleeding when times are tough.

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract?  How do the like-kind exchange rules work when farmland is traded? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is a critical part of the business transition process.

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  Agritourism is a very big thing for some farmers, but does it increase liability potential?  Nuisance issues are also important in agriculture.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  What constitutes a regulatory taking of property that requires the payment of compensation under the Constitution?  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

It is always encouraging to me to see students, farmers and ranchers, agribusiness and tax professionals get interested in the subject matter and see the relevance of material to their personal and business lives. Agricultural law and taxation is reality.  It’s not merely academic.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. It’s also a great investment for any farmer – and it’s updated twice annually to keep the reader on top of current developments that impact agriculture.

If you are interested in obtaining a copy, perhaps even as a Christmas gift, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  Instructors that adopt the text for a course are entitled to a free copy.  The book is available in print and CD versions.  Also, for instructors, a complete set of Powerpoint slides is available via separate purchase.  Sample exams and work problems are also available.  You may also contact me directly to obtain a copy.

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  You may also contact me directly. 

Hemp Production - Regulation and Economics

Overview

The 2018 Farm Bill legitimized the commercial production of hemp by removing it from being a “controlled substance” under federal law.  As a result, it becomes another possible crop for commercial production.  But, many questions abound surrounding hemp production.  What must a producer know to engage in the commercial production of hemp?  Will there be a market for hemp that is produced?  Are any special loans available to help start up the hemp growing operation?  What about labeling and licensing requirements?  How can risk best be managed?  How should contracts for the production of hemp be structured?    

As part of the requirements for my agricultural law course at the law school, Emily J. Young, devoted her research paper to the topic of hemp production.  Emily will be graduating from Washburn Law School next month.  Today’s post is the result of her research into the matter.

Questions surrounding hemp production - it’s the topic of today’s post.

2018 Farm Bill

Historically, federal law made no distinction between hemp and other cannabis plants.  They were considered to be a Schedule I drug – a controlled substance under federal law.  However, the Agriculture Improvement Act of 2018, P.L. 115-334 (also known as the 2018 Farm Bill), removed hemp from the Controlled Substances Act.  21 U.S.C. §§801 et seq. While hemp is a plant from the cannabis family, the 2018 Farm Bill excludes hemp from the statutory definition of marijuana under the Controlled Substance Act if it contains a delta-9 tetrahydrocannabinol (THC, marijuana’s primary psychoactive chemical) concentration of not more than 0.3% on a dry weight basis.  7 USC § 1639o(1). 

In addition, the 2018 Farm Bill establishes a framework where the states and the federal government share regulatory authority over hemp production.  See generally 7 U.S.C § 5940; 7 CFR Part 990.  Section 10111 of the 2018 Farm Bill requires each state department of agriculture to consult with the state’s governor and attorney general to develop a plan for hemp licensing and regulation.  The plan must be submitted to the United States Department of Agriculture (USDA).  A state’s plan cannot be implemented until the USDA approves it.  If a state does not develop its own regulatory program for hemp, the USDA will develop a system regulating hemp growers in that state.

Kansas enacted industrial hemp legislation in 2018 (K.S.A. 2018 Supp. 2-3901 et seq.) and experienced its first harvest in 2019.  The Industrial Hemp Research Program is administered through the Kansas Department of Agriculture (KDA).  The KDA anticipates making a Commercial Industrial Hemp Program available for the 2020 growing season, but the timeline and transition to a commercial program is presently unknown. The KDA submitted the state plan on January 23, 2020 for inclusion into the U.S. Domestic Hemp Production Program and is awaiting a response. Currently, the KDA lists 24 active processor licenses that may accept hemp during the 2020 growing season.

The 2018 Farm Bill also provides that farmers growing industrial hemp can receive banking services in the same manner available to farmers of other commodities.  Indeed, the Board of Governors of the Federal Reserve System along with the Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors issued a joint press release on December 3, 2019 emphasizing that banks are no longer required to file a Suspicious Activity Report (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.  However, for hemp-related customers, the Board of Governors indicated that banks are expected to follow standard SAR procedures and file a SAR if indicia of suspicious activity is present.

While the 2018 Farm Bill legalizes hemp, the production of hemp is more heavily regulated than is the production of other crops due to the effect of the presence of Cannabidiol (CBD), the natural compound in the flower of the female cannabis plant, which is contained in both the hemp and marijuana varieties.  While the CBD derived from hemp does not contain THC at illegal levels, the present uncertainty concerning hemp varieties and growing methods could, at least theoretically, potentially cause illegal levels of THC to be present in a harvested hemp crop.  In addition, hemp has a similar appearance to marijuana that can make it more difficult for law enforcement officials to enforce drug laws governing marijuana.   

Thus, while marijuana remains a Schedule I controlled substance (making illegal its cultivation and sale) CBD can legally be produced from hemp if it is produced by a licensed grower in accordance with federal and state regulations.  In 2018, there were approximately 75,000 acres of hemp grown via permit in the U.S.  It is estimated that permitted U.S. acres of hemp grown in 2019 was between 100,000 and 200,000.

Production Methods and Economics

Farmers grow hemp for grain, fiber, and floral material.  Hemp is usually planted between May and June and harvested in September or October.  It is either cultivated as a row crop or via a horticultural method. Row crop cultivation is generally cheaper and less risky compared to horticultural cultivation and is typically used to grow grain and fiber. The horticultural method involves hemp growing in a manner similar to marijuana. The grower typically uses clone plants (cuts from the mother plant) instead of seeds to have a more uniform crop and higher CBD content. January 2020 pricing indicates that a prospective grower would pay an average of $4.25/plant for clone plants.  Plant spacing under the horticultural method is approximately of 1,000 to 2,200 plants per acre. If the crop is grown for CBD extraction, the current market price is anywhere between $63 and $675 per pound for the hemp flower and approximately $1.00 per percent of CBD per pound for biomass (the organic material of the hemp plant remaining after the flower is harvested and processed). Each plant yield approximately one pound of flower. CBD content varies based on the variety planted and the growing conditions.

The January 2020 industrial seed price average ranged from $3.72 to $8.00 per pound, with an average price of $4.57. Viable seeding density is 25 to 35 pounds per acre.  Hemp grain can sell for an amount between $0.60 to $1.70 per pound, and on average, a farmer can harvest 1,100 pounds of grain per acre. This “traditional” hemp is grown for the manufacture of such items as textiles and bioplastics, and is drilled in a manner comparable to wheat at an approximate rate of 100 plants per square yard. The plant grows tall with the tops harvested for seed production.  It is the stalks that are used for industrial purposes. 

After input and harvest costs, farmers can net approximately $250-300 per acre on grain (traditional hemp). Hemp fiber is presently selling for approximately $275 per ton, and crops can yield between 4 and 5 tons of hemp fiber per acre. These returns are presently higher than returns on corn, soybeans and wheat.  According to data from the Department of Agricultural Economics at Kansas State University, a Kansas farmer in the North Central region of the state can expect net revenue of $46.20 per acre on corn; $48.12 per acre on soybeans and a net loss of $62.93 per acre on wheat. https://agmanager.info/farm-mgmt-guides/2020-farm-management-guides-non-irrigated-crops.

Funding the operation

The 2020 growing season is the first-time hemp producers are eligible to apply for operating, ownership, beginning farmer, and farm storage facility loans through the Farm Service Agency (FSA). A complete loan application requires proof of crop insurance (unless ineligible); a farm operating plan with income history; and a contract for the sale of the crop.  New growers are likely unable to secure a purchase contract before the season starts.  As a result, most hemp producers in Kansas are either using private funding or local credit unions.

Initial license requirements

As of March 2020, the Industrial Hemp Research Program is the only program available to growers in Kansas. Anyone interested in a license for 2021 growing season should review the application checklists to determine the requirements and fees associated with the type of license being sought. See https://agriculture.ks.gov/divisions-programs/plant-protect-weed-control/industrial-hemp/industrial-hemp-applications. 

A license is required for the listing and use of an approved variety of industrial hemp.   K.A.R. 4-34-5(e)(1) https://agriculture.ks.gov/docs/default-source/pp-industrial-hemp/approved-varieties-final.pdf?sfvrsn=9faf85c1_4.   Only authorized seeds or clone plants are permitted to be grown at this time unless otherwise approved by the KDA during the application process.  K.A.R. 4-34-2; 2018 Supp. K.S.A. 2-3901(b)(11).  Authorized seeds include properly imported seeds or clones from another state and accompanied with a proper certification label or seeds from local Kansas distributers that have been tested and the certificate of analysis (COA) meets KDA standards. 2018 Supp. K.S.A. §2-3901(b)(11).  These labels will need to be retained until the pre-harvest inspection (and for 5 years after) to prove that the hemp inspected was grown from the seeds or clones as shown on the label.   §§K.A.R. 4-34-17; K.A.R. 4-34-21. 

Risk Management

Several private insurance companies offer small hail policies and limited coverage for hemp growers. The USDA presently offers two programs to help with loss of a hemp crop. Producers may apply now through their local FSA office, and the deadline to sign up for both programs was March 16, 2020. However, these programs do not cover loss of ‘hot’ crops (THC in excess of 0.3%).

Multi-Peril Crop Insurance Pilot Insurance Program.  This program provides coverage against loss of yield because of insurable causes (natural causes such as weather, insects and disease) of loss for hemp grown for fiber, grain or Cannabidiol (CBD) oil. There are minimum acreage requirements - 5 acres for CBD and 20 acres for grain and fiber. To be eligible for MPCI, a hemp producer must also have at least a one-year history of production and have a contract for the sale of the insured hemp.   The program is available in 21 states, including Kansas.

Noninsured Crop Disaster Assistance Program.  This program protects against losses associated with lower yields, destroyed crops or prevented planting where no permanent federal crop insurance program is available. In general, assistance is available for losses that exceed 50 percent of the crop or for prevented plantings that exceed 35 percent of the intended crop acres. The amount paid is 55 percent of the average market price for crop losses.

Contractual Issues

Types of contracts.  A purchase contract is typically entered into after a grower has completed harvest or immediately before harvest once quantity and grade of the crop is known. The buyer then makes a purchase offer for the crop with the price reflecting market demands and crop quality.

A production contract is an agreement entered into between the grower and buyer for the crop before planting. The contract denotes the obligations of the parties and specifies the quantity, quality, and price or a method to determine price of the crop.  Under a production contract, a processor usually supplies the seed and inputs and the grower provides the labor and the land. The harvested crop is then delivered to the processor who pays the agreed upon price adjusted for certain contract specifications.  Typically, under a production contract, the grower has no ownership rights in the seed or the harvested crop.  As such, the grower cannot legally sell the crop to a third party or pledge it as collateral. 

Under a split processing agreement, the processor extracts the CBD and returns a portion of the finished product to the grower.  Under a typical agreement, the processor retains 40 percent of the extract as the processing fee and returns 60 percent to the grower either in kind or in accordance with market value.

Quantity.  A contract may require production from a set number of acres or the delivery of pounds of biomass.  If production from an acreage is specified, the grower is obligated to deliver all the crop produced on the identified acres in accordance with a “best efforts” or “best farming practices” measure of performance. Thus, if there is complete crop failure and the grower has utilized “best efforts” or utilized “best farming practices,” the grower is not liable for the shortfall and the buyer is not obligated to pay.  Currently, litigation in Oregon involves claims surrounding a “best farming practices” clause.  See https://hempindustrydaily.com/oregon-hemp-production-lawsuits-may-offer-lessons-for-farmers/. 

Alternatively, a contract may contain a “passed acreage clause.”  This clause allows the buyer to refuse acceptance of the entire crop produced from the designated acreage.  This clause is common in vegetable contracts and may could be utilized in hemp contracts.  

A contract could also be structured as an output contract where no quantity is specified, and the grower sells the entire output to the buyer.

Quality and crop conditions.  A contract will likely set forth quality standards for the crop and how those quality standards are to be established.  Related provisions will denote acts that can give rise to contract termination, the grower’s right to cure and whether the grower retains the right to sell the crop if a processor (buyer) rejects it. 

A contract will likely contain language specifying the condition of the crop on delivery and the buyer’s right of inspection.  A processor may require a sample from each load a grower brings in before accepting the crop. They may also want to specify the timeframe they have to inspect the crop to account for changes in the crop.  For example, contract language may address the issue of crop rejection as well as applicable discounts if a delivered crop’s CBD content falls below the contract-specified percentage after delivery but before processing.  This clause could also address any related pricing issues associated with the change in CBD or THC content from time of delivery to time of processing. 

Force majeure events/cancellation provision.  A force majeure provision allows a party to suspend or terminate its obligations when certain events happen beyond their control. Such a clause may be present in a contract involving hemp production with thought given to triggering events. 

Other provisions.  Additional contract clauses may address such matters as choice of law and dispute resolution.

Tax Issues

I.R.C. §280E limits income tax deductions for businesses that traffic in controlled substances to cost-of-goods-sold (COGS) as an adjustment to gross receipts.   See also C.C.A. 201504011 (Dec. 12, 2014).  Because hemp is no longer a Schedule I controlled substance, the I.R.C. §280E limitations don’t apply.  While hemp producers and resellers must follow the inventory costing methods of Treas. Reg. §1.471, they are not subject to the uniform capitalization rules if average gross receipts are $25 million or less (inflation-adjusted for years beginning after 2017) for the three preceding tax years and the business does not fall within the definition of a “tax shelter.”  Likewise, if these tests are met, the business need not calculate an I.R.C. §263A adjustment. 

Conclusion

The removal of hemp as a federally controlled substance provides another crop growing option for growers to consider.  However, the regulatory system governing hemp production is complex and involves both state and federal regulatory bodies.  Contracts for hemp production also present unique issues.  Economically, hemp production can be an addition to a farmer’s common crop production routine or may serve as an alternative depending on anticipated net revenues.   Is hemp the present-day equivalent of the Jerusalem Artichoke of the 1980s?  Only time will tell.

Is An Abandoned Farmhouse a “Dwelling”?

Overview

Farmers and ranchers often own property that is in remote locations and is out in the open where it is potentially subject to theft and/or burglary.  Sometimes, the old homestead remains standing and is used for storage or some other function other than as a residence.  Protecting personal property that is contained in such a building presents the issue of what the proper manner of providing protection might be.  See, e.g., Katko v. Briney, 183 N.W. 2d 657 (Iowa 1971).  Another issue involves what the property classification of the crime is if the dwelling is broken into and items are stolen.

The crime classification of burglary of an old farmstead – that’s the topic of today’s post. 

Common Law and Modern Approaches

The common law defines burglary as the trespassory breaking and entering of the dwelling house of another in the nighttime with the intent to commit a felony. The intent to commit a felony must accompany the breaking and entering. Thus, under the common law approach, a person who did not have the intent to commit a felony at the time of breaking and entering someone else's dwelling could not be convicted of burglary even if the perpetrator had a change of heart and stole something once inside the home. On the other hand, a defendant who intended to commit a felony at the time of breaking and entering a dwelling could be convicted of burglary even if nothing was stolen.

Modern burglary statutes in many jurisdictions eliminate most of the common law elements of burglary.  Prior to its repeal effective July 1, 2011, Kansas law defines “burglary” as “knowingly and without authority entering into or remaining within any...building, manufactured home, mobile home, tent or other structure which is not a dwelling, with the intent to commit a felony, theft or sexual battery therein...”.  Kan. Stat. Ann. § 21-3715(b). That statutory language had been held to be inapplicable to an open-faced lean-to attached to the side of a workshop, because the lean-to did not provide an enclosed space for the security of persons or property contained therein. State v. Moler, 2 P.3d 773 (Kan. 2000).    

The Model Penal Code (MPC) defines burglary as “the entering of a building or occupied structure, or separately secured or occupied portion thereof, with purpose to commit a crime therein, unless the premises are at the time open to the public or the actor is licensed or privileged to enter.”  Under the MPC, burglary is a felony if it is committed in another person's home at night or if the perpetrator “purposely, knowingly, or recklessly” injured another person or attempted to do so or “is armed with explosives or a deadly weapon.”  Model Penal Code §221.1.

When Is a Farmhouse Not a “Dwelling”?

In State v. Downing, No. 116,629, 2017 Kan. App. Unpub. LEXIS, 1092 (Kan. Ct. App. Dec. 15, 2017), aff’d., No. 116,629, 2020 Kan. LEXIS 6 (Kan. Sup. Ct. Jan. 24, 2020), the State of Kansas charged the defendant with burglary of a dwelling and attempted theft of property valued at less than $1,000. A jury found the defendant guilty of both crimes, and the court ordered the defendant to a Community Corrections facility for 24 months. The underlying sentence was 21 months in prison for burglary and six months in jail for theft, with the sentences to be served concurrently.

On appeal, the appellate court reversed. The appellate court noted that K.S.A. §21-5807(a)(1) (the replacement statutory provision for Kan. Stat. Ann. §21-3715) defines burglary as “without authority, entering into or remaining within any… [d]welling, with intent to commit a felony, theft, or sexually motivated crime therein.” “Dwelling” is defined as a building that is used or intended to be used as a human habitation, home, or residence.

The appellate court noted that the residence at issue was a 100- year old farmhouse that was used to store personal items that had been vacant for over two years prior to the alleged crime, and the owner had no intent to again live in it or rent it. Instead, it was used as storage space. Accordingly, the farmhouse did not meet the statutory definition of “dwelling” that was used or intended to be used as a habitation, and the State failed to prove beyond a reasonable doubt that the house was a dwelling. The appellate court reversed the defendant’s conviction for burglary of a dwelling and vacated her sentence.

On further review, the state Supreme Court affirmed on the basis that the evidence revealed that the landowner lacked the present intent to use the farmhouse as a dwelling. The Supreme Court also rejected the State’s argument that the defendant should have been resentenced because that issue was not raised below. 

Conclusion

The recent Kansas Supreme Court decision points out another interesting facet of agricultural law.  An old farmhouse that is no longer occupied as a residence may not qualify as a “dwelling” under state law defining burglary of a dwelling.  But, remember, what constitutes a “dwelling” for this purpose is tied to a particular state’s statutory definition.  Just another thing to keep in mind when considering steps to be taken to protect farm property contained in such a structure from those that would attempt to steal those items. 

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech

Overview

A couple of weeks ago I did a post on some recent developments in the courts involving ag law and ag tax.  Since that time, there have been additional important court developments.  Before getting deep into tax season, it may be a good idea to provide a summary of a few of these cases.

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

Bankruptcy Discharge and Fraud

In re Kurtz, 604 B.R. 349 (Bankr. D. Neb. 2019)

A major feature of bankruptcy in the United States is the ability to discharge at least some debt.  This makes possible the “fresh start” for debtors. But, some debtors and debts are not eligible for discharge.  Of the several categories of debts that aren’t eligible for discharge, one category is reserved for debts associated with the debtor’s fraudulent conduct.  In this case, the creditor was a landlord and the debtor was the farm tenant who put up hay and other crops on the landlord’s land. The parties did not have a written lease agreement, but the landlord assumed the lease was a 50-50 crop share agreement where the parties would split the expenses and the sale proceeds equally. The record was unclear as to what the tenant understood the relationship to be, but he did make statements to others that it was a cash rent lease. The tenant did not pay the landlord after the first two cuttings of hay because he incurred expenses while cutting. After the third cutting was bailed the landlord contacted the tenant about payment. The tenant told the landlord that he could have the proceeds from the third cutting of hay and that the tenant was finished farming for the landlord. The tenant paid a third party to stack the hay. When the landlord attempted to sell the hay he discovered that the tenant had already given the hay to a third party to settle a debt. Both parties submitted expenses related to the hay crop that year.

The landlord filed a complaint in the tenant’s bankruptcy case alleging fraud and misrepresentation seeking that the debt to the landlord not be discharged. The bankruptcy court agreed, determining that the landlord proved that the tenant’s obligation of $5,916.50 was exempt from discharge because of the debtor’s false representation. The bankruptcy court determined that the full debt owed to the landlord was $22,292.84 based on the oral lease, but that the only part of that amount derived from fraud was the amount related to the third cutting of hay - $5,370.50 plus $546 for stacking. The balance of the unpaid debt arose from a general misunderstanding that wasn’t settled before the debtor put up the first two hay cuttings. The only blatant dishonesty, the bankruptcy court determined, concerned the third cutting.  

Aerial Application of Ag Chemicals Not Inherently Dangerous

Keller Farms, Inc. v. Stewart, No. 1:16 CV 265 ACL, 2018 U.S. Dist. LEXIS 210209 (E.D. Mo. Dec. 13, 2018), aff’d. sub. nom., Keller Farms, Inc. v. McGarity Flying Service, LLC, No. 18-3755, 2019 U.S. App. LEXIS 36664 (8th Cir. Dec. 11, 2019)

This case involves a dispute involving alleged damage to the plaintiffs’ trees caused by chemicals that allegedly drifted during aerial application. The plaintiffs attempted to hold liable both the aerial applicator and the landowner that hired the applicator. The plaintiffs claimed the landowner was vicariously liable (liable because of the relationship with the applicator) for the applicator’s actions because aerial spraying of burndown chemicals is an "inherently dangerous activity." The trial court granted the defendants’ motion for Judgment as a Matter of Law on the plaintiff's trespass claim, but the remaining issues were left for the jury to resolve. The jury returned a verdict in favor of the defendants on the negligence and negligence per se claims. The plaintiffs filed a motion for a new trial, arguing the verdict was against the weight of the evidence; that the trial court erred in excluding evidence; and that the trial court erred in granting the defendants’ Motion for Judgment as a Matter of Law. The trial court, however, denied the plaintiff’s motion for a new trial.

On appeal, the appellate court affirmed. The appellate court determined that the jury’s verdict was not against the weight of the evidence, and that the aerial application of herbicides was commonplace and not inherently dangerous. In addition, the appellate court noted that the defendants’ evidence was that the herbicides did not actually drift onto the plaintiffs’ property and that the applicator complied with all label requirements and sprayed during optimal conditions. The appellate court also determined that the trial court had ruled properly on evidentiary matters and that the plaintiff had not proven the alleged monetary damages to the trees properly. The appellate court also upheld the trial court’s denial of the plaintiff’s motion for a new trial.

The Line Between Nondeductible Start-Up Expenses and Deductible Business Expenses

Primus v. Comr., T.C. Sum. Op. 2020-2

The petitioner lived in New York and bought a property in Quebec containing 200 maple trees with a significant number of them being mature, maple syrup-producing trees. The tract contained other types of trees and pasture ground and hay fields and a small amount of ground suitable for growing crops. There were also various improvements on the tract. Before collecting sap and producing syrup, the petitioner thinned underbrush and later installed a pipeline to collect sap. Sap production began in 2017. When the petitioner bought the property in 2012, the cleared the areas of the tract where he planned to plant blueberry bushes. He ordered 2,000 blueberry bushes in 2014 and planted them in 2015. He reported a substantial amount of farming-related expenses in 2012 and 2013, with most of the expenses attributable to costs of repairs to improvements on the property. The petitioner deducted expenses attributable to preparatory costs for the production of selling maple syrup and blueberries as trade or business expenses under I.R.C. §162 (or as I.R.C. §212 expenses for income-producing property).

The IRS denied the deductions, asserting that they were nondeductible start-up expenses under I.R.C. §195 on the basis that the petitioner had not yet begun the business of producing maple syrup and blueberries. The Tax Court upheld the IRS position. The Tax Court noted that expenses are not deductible as trade or business expenses until the business is actually functioning and performing the activities for which it was organized. Here, the petitioner had not actually started selling blueberries or sap in either 2012 or 2013.  That meant that the expenses incurred in 2012 and 2013 were incurred to prepare the farm to produce sap and plant blueberries, and were nondeductible startup expenses. The thinning activities, while a generally acceptable industry practice, did not establish that the business had progressed beyond the startup phase. In addition, during the years at issue, the petitioner had not collected sap, installed any infrastructure needed to convert sap into syrup, or bought any blueberry bushes. 

Lying With Purpose of Harming Livestock Facility is Protected Speech

Animal Legal Defense Fund v. Schmidt, No. 18-2657-KHV, 2020 U.S. Dist. LEXIS 10202 (D. Kan. Jan. 22, 2020)

The plaintiffs are a consortium of activist groups regularly conduct undercover investigations of livestock production facilities. Some of the plaintiffs gain access to farms through employment without disclosing the real purpose for which they seek employment (and lie about their ill motives if asked) and wear body cameras while working. For those hired into managerial and/or supervisory positions, they gain the ability to close off parts of the facility to avoid detection when filming and videoing. The film and photos obtained are circulated through the media and with the intent of encouraging public officials, including law enforcement, to take action against the facilities. The employee making the clandestine video or taking pictures, is on notice that the facility owner forbids such conduct via posted notices at the facility. The other plaintiffs utilize the data collected to cast the facilities in a negative public light, but do no “investigation.”

In 1990, Kansas enacted the Kansas Farm Animal and Field Crop and Research Facilities Protect Act (Act). K.S.A. §§ 47-1825 et seq.  The Act makes it a crime to commit certain acts without the facility owner’s consent where the plaintiff commits the act with the intent to damage an animal facility. Included among the prohibited acts are damaging or destroying an animal facility or an animal or other property at an animal facility; exercising control over an animal facility, an animal from an animal facility or animal facility property with the intent to deprive the owner of it; entering an animal facility that is not open to the public to take photographs or recordings; and remaining at an animal facility against the owner's wishes. K.S.A. § 47-1827(a)-(d). In addition, K.S.A. § 47-1828 provides a private right of action for "[a]ny person who has been damaged by reason of a violation of K.S.A. § 47-1827 against the person who caused the damage." For purposes of the Act, a facility owner’s consent is not effective if it is induced by force, fraud, deception duress or threat. K.S.A. § 47-1826(e). The plaintiff challenged the constitutionality of the Act, and filed a motion for summary judgment. The defendant also motioned for summary judgment on the basis that the plaintiffs lacked standing or, in the alternative, the Act barred trespass rather than speech.

On the standing issue, the trial court held that the plaintiffs lacked standing to challenge the portions of the Act governing physical damage to an animal facility (for lack of expressed intent to cause harm) and the private right of action provision, However, the trial court determined that the plaintiffs did have standing to challenge the exercise of control provision, entering a facility to take photographs, etc., and remaining at a facility against the owner’s wishes to take pictures, etc. The plaintiffs that did no investigations but received the information from the investigations also were deemed to have standing on the same grounds. On the merits, the trial court determined that the Act regulates speech by limiting what the plaintiffs could say and by barring pictures/videos. The trial court determined that the provisions of the Act at issue were content-based and restricted speech based on viewpoint – barring only that speech that would harm an animal facility. The trial court determined that barring lying is only constitutionally protected when it is associated with a legally recognizable harm, and the Act is unconstitutional to the extent it bars false speech intended to damage livestock facilities. Because the provisions of the Act at issue restrict content-based speech, its constitutionality is measured under a strict scrutiny standard. As such, a compelling state interest in protecting legally recognizable rights must exist. The trial court concluded that even if privacy and property rights involved a compelling state interest, the Act must be narrowly tailored to protect those rights. By focusing only on those intending to harm owners of a livestock facility, the Act did not bar all violations of property and privacy rights. The trial court also determined that the Governor was a proper defendant. 

The status of the litigation presently rests with the Kansas Attorney General and the Governor to determine the next step(s) to be taken.

Conclusion

There is never a dull moment in agricultural law and taxation.  I will provide more updates like this is in future posts.

Principles of Agricultural Law

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46^th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

More Ag Law and Tax Developments

Overview

It’s been a while since I have devoted a post to recent developments, so that’s what today’s post is devoted to.  There are always many significant developments in ag law and tax.  I was pleased recently when one of my law students, near the conclusion of the course, commented on how many areas of the law that agricultural law touches and how often the rules as applied to farmers and ranchers are different.  That is so true.  Ag law is daily life for a farmer, rancher, rural landowner, and agribusiness in action.

Recent development in ag law and tax – that’s the topic of today’s post.

Chapter 12 Plan Not Feasible

As I have written in other posts, when a farmer files Chapter 12 bankruptcy, the reorganization plan that is proposed must be feasible.  That means that the farmer must estimate reasonable crop yields and revenue based on historical data, and also provide reasonable estimates of expenses.  Courts also examine other factors to determine whether a reorganization plan is feasible.

In, In re Jubilee Farms, 595 B.R. 546, 2018 Bankr. LEXIS 4080 (Bankr. E.D. Ky. Dec. 28, 2018), the debtor, a farm partnership operated by two brothers, farmed primarily corn and soybeans. The Debtors filed Chapter 12 bankruptcy in early 2018. In May of 2018, the Debtors filed a joint Chapter 12 plan, but the secured creditors, FCMA and FCS, objected. The debtors filed an amended Chapter 12 plan providing FCMA with a fully secured claim of roughly $2.7 million and FCS with a fully secured claim of roughly $180,000. The plan provided for periodic payments funded primarily by the debtor’s farming income and supplemented by custom trucking and combining revenue. Additional funding in the first year would come from crop insurance and anticipated federal aid for farmers affected by political activity upsetting foreign crop sales.

The creditors and the Trustee objected to the confirmation of the amended plan on various grounds, but the main argument raised was that the amended plan was not feasible, because the debtor’s one-year income and expense projections were limited and unrealistic compared to the debtor’s historical income and expenses. An evidentiary hearing was held to present projected revenue and expenses for the farm and thus determine the feasibility (whether the debtor could make all plan payments and comply with the plan) of the amended plan.

The court analyzed the projected revenues and expenses for the coming year, and the concluded that the plan was not feasible because the debtors had failed to prove that the plan was feasible beyond March 2019. The court stated that if the debtors only had to prove they could make the payments required up to March 2019, the debtors would prevail because the testimony created a reasonable belief that the receipts necessary to make payments up to that time either had or would soon occur. However, beyond March 2019 that was not the case. The court compared the debtors’ projections to calculations using the yield and price per acre that was supported by the record. The record showed that the debtors could only pay anticipated operating expenses and plan payments after March 2019 if the debtor’s unsupported projections were used. The projections using the bushels per acre and price per bushel only showed revenue of $592,000 to $736,000 with expenses of $872,000. Given this lack of ability to pay combined with the debtor’s projections overstating revenue from soybean production during the 2019 crop year the court found that the debtors anticipated receipts simply did not cover the debtors’ obligations to pay operating expenses and plan payments beyond March 2019. Thus, the plan was not feasible and the court denied confirmation of the amended plan.

Grazing Scam Results in Fraud Convictions

There are various scams that one can get caught up in, but they don’t often involve cattle grazing.  However, a recent case did involve a cattle grazing scam.  In United States v. Hagen, No. 17-3279, 2019 U.S. App. LEXIS 6109 (8th Cir. Feb. 28, 2019), the defendant and his ex-wife set up a company to provide custom grazing in 2004. The ex-wife obtained grazing leases on tribal land from the Bureau of Indian Affairs ("BIA"). The defendant worked with ranchers to set up custom grazing contracts. In 2011, the BIA issued letters to the defendants for non-compliance with leasing procedures. In 2012, the defendants had leased enough pasture to sustain 57.92 cow-calf pairs but contracted to graze with three cattle producers for the lease of 100 cow-calf pairs and 200 heifers. That summer, 70 pairs were grazed for the full term of the grazing contract, and 33 pairs belonging to another rancher were grazed for a day. A third rancher was forced to find other pasture for his heifers. In 2013, the defendants had leased pasture for 91.26 pairs and had contracted with six different producers to graze a total of 380 pairs. A total of $126,500 was paid upfront by the producers. Not a single pair was grazed that summer and no rancher was reimbursed.

In 2014, the defendants had leased pasture for 6.67 pairs and again over-contracted with three ranchers for 300 pairs, who paid $102,500 up front. No pairs grazed during the summer of 2014 and the ranchers were not reimbursed. The defendants were charged with three counts of wire fraud, four counts of mail fraud, and one count of conspiracy to commit mail and wire fraud for their fraudulent contracting/leasing practices. The ex-wife plead guilty to the conspiracy count and testified against the her ex-spouse at trial. He was convicted by a jury on all eight counts. Sentencing included 46 months imprisonment and 3 years of supervised release on each count, restitution in the amount of $236,000, and a $100 special assessment on each count. The defendant appealed on the basis that the evidence was insufficient to prove he had the requisite intent to defraud, and that the two mailings were not in furtherance of any fraud.

The appellate court affirmed the defendant’s conviction of conspiracy to commit mail and wire fraud, but vacated the conviction and special assessments on the other five substantive counts. The appellate court determined that sufficient evidence supported the jury verdict that the ex-husband had conspired to commit fraud by contracting with twelve different cattle producers to graze cattle. Only one of those contracts had been filled, and the defendants failed to issue refunds on the other contracts for the the 2012-2014 grazing seasons. The appellate court also found sufficient evidence to support the jury’s verdict of use of mail and wire to defraud. One of the ranchers had mailed the defendant a $35,000 check, as full payment for the grazing contract and the defendant had cashed the check using a wire transmission a week later. There was a pasture visit where a rancher was assured that the pasture could support 200 pairs. Another contract was signed by the rancher’s son, and another $35,000 check was written to the defendant. This second contract brought the total contracted to graze with the defendant to 200 pairs for $70,000. It later became evident that the defendant only had 40 acres leased, enough to sustain 6.67 pairs. When it came time for delivery, the defendant did not return any calls. The ranch did not graze any cattle that season nor issued refunds for their payments. The appellate court determined that the evidence was sufficient for the jury to conclude that the defendant knowingly only had enough pasture to graze 6 pairs but nonetheless contracted to graze 200 pairs with this rancher. However, the appellate court vacated the convictions and special assessments tied to specific instance of fraud against different ranchers. The dry conditions that limited the length of the grazing season likely lead to a breach of contract for early termination, rather than an intent to defraud. Other mailings by the defendants containing offers to graze cattle were not in furtherance of fraud, and the convictions and special assessments related to these mailings were vacated.

Fences, Boundary Lines and Adverse Possession

Fences and boundary issues present many court cases.  It is certainly true that good fences make good neighbors.  Bad fences and boundary disputes tend to bring out the worst in neighbors.  A recent Alabama case illustrates the issues that can arise when fences and boundary issues are involved.  In Littleton v. Wells, No. 2170948, 2019 Ala. Civ. App. LEXIS 20 (Civ. App. Feb. 22, 2019), a predecessor sold 82 acers to the defendants in 2015. This land had been in the same family for generations, however the seller had only been on the property “maybe twice” since 1989. The plaintiffs received title to their property from their parents, who had been there since 1964. There were three fences between the party’s properties. The defendant relied on a 1964 survey when making his purchase, thinking the property line was the middle fence.  No survey was completed at that time.

In 2000, the mapping office notified the parties of a “conflict.” The office determined the actual boundary to be closer to the fence on the defendant’s property rather than the middle fence. However, this determination was for tax purposes and was not a substitute for a survey. The plaintiffs also treated the third fence line, like the map office, as the boundary line.

The plaintiffs grazed cattle up to the furthest fence and maintained all the ground between the fences as their own. The plaintiff also testified as to working on the furthest fence as a child in the 1960’s. The plaintiffs also showed that they held annual gatherings and the kids would play in the creek on the disputed ground. There was also evidence that the plaintiffs leased the disputed ground to others. The plaintiffs did not present all the witnesses as to the family’s use of the property up to the furthest fence. Nor was the employee of the map office testimony heard in court.

The trial court determined that the property line was to be the closer center fence, not the third fence as the plaintiffs claimed. The court ordered an official survey to their findings and entered that survey as the final order. The plaintiffs appealed. The appellate court reversed and remanded. The plaintiffs’ challenged the trial court’s denial of their adverse possession claim and determination of the location of the boundary line. The court looked at all the evidence on record from trial, when analyzing the plaintiff’s adverse possession claim. The appellate court held that the record showed that the plaintiffs had been in actual, hostile, open, notorious, exclusive, and continuous possession of the disputed property for more than ten years (the statutory timeframe). The plaintiffs had presented evidence to support every one of those elements and the defendants have not rebutted any element. The only evidence the defendant presented to rebut the plaintiffs’ evidence was a “belief” that he owned up to the second fence. Since the lower court was erroneous in determining the adverse possession claim, the appellate court did not need to analyze the boundary line determination. The court remanded to create a new boundary line that included the property that the plaintiffs had adversely possessed.

Conclusion

There’s never a dull moment in agricultural law.  It’s everyday reality in the life of a farmer, rancher, rural landowner and agribusiness.

The "Almost Top Ten" Ag Law and Tax Developments of 2018

Overview

2018 was a big year for developments in law and tax that impact farmers, ranchers, agribusinesses and the professionals that provide professional services to them.  It was also a big year in other key areas which are important to agricultural production and the provision of food and energy to the public.  For example, carbon emissions in the U.S. fell to the lowest point since WWII while they rose in the European Union.  Poverty in the U.S. dropped to the lowest point in the past decade, and the unemployment rate became the lowest since 1969 with some sectors reporting the lowest unemployment rate ever.  The Tax Cuts and Jobs Act (TCJA) doubles the standard deduction in 2018 compared to 2017, which will result additional persons having no federal income tax liability and other taxpayers (those without a Schedule C or F business, in particular) having a simplified return.  Wages continued to rise through 2018, increasing over three percent during the third quarter of 2018.  This all bodes well for the ability of more people to buy food products and, in turn, increase demand for agricultural crop and livestock products.  That’s good  news to U.S. agriculture after another difficult year for many commodity prices.

On the worldwide front, China made trade concessions and pledged to eliminate its “Made in China 2025” program that was intended to put China in a position of dominating world economic production.  The North-Korea/South Korea relationship also appears to be improving, and during 2018 the U.S. became a net exporter of oil for the first time since WWII.  While trade issues with China remain, they did appear to improve as 2018 progressed, and the USDA issued market facilitation payments (yes, they are taxed in the year of receipt and, no, they are not deferable as is crop insurance) to producers to provide relief from commodity price drops as a result of the tariff battle. 

So, on an economic and policy front, 2019 appears to bode well for agriculture.  But, looking back on 2018, of the many ag law and tax developments of 2018, which ones were important to the ag sector but just not quite of big enough significance nationally to make the “Top Ten”?  The almost Top Ten – that’s the topic of today’s post.

The “Almost Top Ten” - No Particular Order

Syngenta litigation settles.  Of importance to many corn farmers, during 2018 the class action litigation that had been filed a few years ago against Syngenta settled.  The litigation generally related to Syngenta's commercialization of genetically-modified corn seed products known as Viptera and Duracade (containing the trait MIR 162) without approval of such corn by China, an export market. The farmer plaintiffs (corn producers), who did not use Syngenta's products, claimed that Syngenta's commercialization of its products caused the genetically-modified corn to be commingled throughout the corn supply in the United States; that China rejected imports of all corn from the United States because of the presence of MIR 162; that the rejection caused corn prices to drop in the United States; and that corn farmers were harmed by that market effect.  In April of 2018, the Kansas federal judge handling the multi-district litigation preliminarily approved a nationwide settlement of claims for farmers, grain elevators and ethanol plants.  The proposed settlement involved Syngenta paying $1.5 billion to the class.  The class included, in addition to corn farmers selling corn between September of 2013 and April of 2018, grain elevators and ethanol plants that met certain definition requirements.  Those not opting out of the class at that point are barred from filing any future claims against Syngenta arising from the presence of the MIR 162 trait in the corn supply.  Parties opting out of the class can't receive any settlement proceeds, but can still file private actions against Syngenta.  Parties remaining in the class had to file claim forms by October of 2018.   The court approved the settlement in December of 2018, and payments to the class members could begin as early as April of 2019. 

Checkoff programs.  In 2018, legal challenges to ag “checkoff” programs continued.  In 2017, a federal court in Montana enjoined the Montana Beef Checkoff.  In that case, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, No. CV-16-41-GF-BMM, 2017 U.S. Dist. LEXIS 95861 (D. Mont. Jun. 21, 2017), the plaintiff claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was unconstitutional.  The Beef Checkoff imposes a $1.00/head fee at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board. The plaintiff claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision was finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff. On further review by the federal trial court, the court adopted the magistrate judge’s decision in full. The trial court determined that the plaintiff had standing on the basis that the plaintiff would have a viable First Amendment claim if the Montana Beef Council’s advertising involves private speech, and the plaintiff did not have the ability to influence the advertising of the Montana Beef Council. The trial court rejected the defendant’s motion to dismiss for failure to state a claim on the basis that the court could not conclude, as a matter of law, that the Montana Beef Council’s advertisements qualify as government speech. The trial court also determined that the plaintiff satisfied its burden to show that a preliminary injunction would be appropriate. 

The USDA appealed the trial court’s decision, but the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court in 2018.  Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, 718 Fed. Appx. 541 (9th Cir. 2018).  Later in 2018, as part of the 2018 Farm Bill debate, a provision was proposed that would have changed the structure of federal ag checkoff programs.  It did not pass, but did receive forty percent favorable votes.    

GIPSA rules withdrawn.  In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) an interim final rule and two proposed regulations setting forth the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The proposals generated thousands of comments, with ag groups and producers split in their support. The proposals concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. 

The interim final rule and the two proposed regulations stemmed from 2010.  In that year, the Obama administration’s USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA. 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010).  Under the proposed regulations, "likelihood of competitive injury" was defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It included, but was not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) was stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically noted that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also specified that a PSA violation could occur without a finding of harm or likely harm to competition, contrary to numerous court opinions on the issue.

On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017, with the due date for public comment set at June 12, 2017.  However, on October 17, 2017, the USDA withdrew the interim rule.  The withdrawal of the interim final rule and two proposed regulations was challenged in court.  On December 21, 2018, the U.S. Court of Appeals for the Eighth Circuit denied review of the USDA decision.  In Organization for Competitive Markets v. United States Department of Agriculture, No. 17-3723, 2018 U.S. App. LEXIS 36093 (8th Cir. Dec. 21, 2018), the court noted that the USDA had declined to withdraw the rule and regulations because the proposal would have generated protracted litigation, adopted vague and ambiguous terms, and potentially bar innovation and stimulate vertical integration in the livestock industry that would disincentivize market entrants.  Those concerns, the court determined, were legitimate and substantive.  The court also rejected the plaintiff’s argument that the court had to compel agency action.  The matter, the court concluded, was not an extraordinary situation.  Thus, the USDA did not unlawfully withhold action. 

No ”clawback.”   In a notice of proposed rulemaking, the U.S Treasury Department eliminated concerns about the imposition of an increase in federal estate tax for decedents dying in the future at a time when the unified credit applicable exclusion amount is lower than its present level and some (or all) of the higher exclusion amount had been previously used. The Treasury addressed four primary questions. On the question of whether pre-2018 gifts on which gift tax was paid will absorb some or all of the 2018-2025 increase in the applicable exclusion amount (and thereby decrease the amount of the credit available for offsetting gift taxes on 2018-2025 gifts), the Treasury indicated that it does not. As such, the Treasury indicated that no regulations were necessary to address the issue. Similarly, the Treasury said that pre-2018 gift taxes will not reduce the applicable exclusion amount for estates of decedents dying in years 2018-2025.

The Treasury also stated that federal gift tax on gifts made after 2025 will not be increased by inclusion in the tax computation a tax on gifts made between 2018 and 2015 that were sheltered from tax by the increased applicable exclusion amount under the TCJA.  The Treasury concluded that this is the outcome under current law and needed no regulatory “fix.” As for gifts that are made between 2018-2025 that are sheltered by the applicable exclusion amount, the Treasury said that those amounts will not be subject to federal estate tax in estates of decedents dying in 2026 and later if the applicable exclusion amount is lower than the level it was at when the gifts were made. To accomplish this result, the Treasury will amend Treas. Reg. §20.2010-1 to allow for a basic exclusion amount at death that can be applied against the hypothetical gift tax portion of the estate tax computation that is equal to the higher of the otherwise applicable basic exclusion amount and the basic exclusion amount applied against prior gifts.

The Treasury stated that it had the authority to draft regulations governing these questions based on I.R.C. §2001(g)(2). The Treasury, in the Notice, did not address the generation-skipping tax exemption and its temporary increase under the TCJA through 2025 and whether there would be any adverse consequences from a possible small exemption post-2025. Written and electronic comments must be received by February 21, 2019. A public hearing on the proposed regulations is scheduled for March 13, 2019. IRS Notice of Proposed Rulemaking, REG-106706-18, 83 FR 59343 (Nov. 23, 2018).

Conclusion

These were significant developments in the ag law and tax arena in 2018, but just not quite big enough in terms of their impact sector-wide to make the “Top Ten” list.  Wednesday’s post this week will examine the “bottom five” of the “Top Ten” developments for 2018. 

Agricultural Law Online!

Overview

For the Spring 2019 academic semester, Kansas State University will be offering my Agricultural Law and Economics course online. No matter where you are located, you can enroll in the course and participate in it as if you were present with the students in the on-campus classroom.
Details of next spring’s online Ag Law course – that’s the topic of today’s post.

Course Coverage

The course provides a broad overview of many of the issues that a farmer, rancher, rural landowner, ag lender or other agribusiness will encounter on a daily basis. As a result, the course looks at contract issues for the purchase and sale of agricultural goods; the peril of oral contracts; the distinction between a lease and a contract (and why the distinction matters); and the key components of a farm lease, hunting lease, wind energy lease, oil and gas lease, and other types of common agricultural contractual matters. What are the rules surrounding ag goods purchased at auction?

Ag financing situations are also covered – what it takes to provide security to a lender when financing the purchase of personal property to be used in the farming business. In addition, the unique rules surrounding farm bankruptcy is covered, including the unique tax treatment provided to a farmer in Chapter 12 bankruptcy.

Of course, farm income tax is an important part of the course. Tax planning is perhaps the most important aspect of the farming business that every day decisions have an impact on and are influenced by. As readers of this blog know well, farm tax issues are numerous and special rules apply in many instances. The new tax law impacts many areas of farm income tax.

Real property legal issues are also prevalent and are addressed in the course. The key elements of an installment land contract are covered, as well as legal issues associated with farm leases. Various types of interests in real estate are explained – easements; licenses; profits, fee simples, remainders, etc. Like-kind exchange rules are also covered as are the special tax rules (at the state level) that apply to farm real estate. A big issue for some farmers and ranchers concerns abandoned railways, and those issues are covered in the course. What if an existing fence is not on the property line?
Farm estate and business planning is also a significant emphasis of the course. What’s the appropriate estate plan for a farm and ranch family? How should the farming business be structured? Should multiple entities be used? Why does it matter? These questions, and more, are addressed.

Agricultural cooperatives are important for the marketing of agricultural commodities. How a cooperative is structured and works and the special rules that apply are also discussed.

Because much agricultural property is out in the open, that means that personal liability rules come into play with respect to people that come onto the property or use farm property in the scope of their employment. What are the rules that apply in those situations? What about liability rules associated with genetically modified products? Ag chemicals also pose potential liability issues, as do improperly maintained fences? What about defective ag seed or purchased livestock that turns out to not live up to representations? These issues, and more, are covered in the scope of discussing civil liabilities.

Sometimes farmers and ranchers find themselves in violation of criminal laws. What are those common situations? What are the rules that apply? We will get into those issue too.

Water law is a very big issue, especially in the western two-thirds of the United States. We will survey the rules surrounding the allocation of surface water and ground water to agricultural operations.

Ag seems to always be in the midst of many environmental laws – the “Clean Water Rule” is just one of those that has been high-profile in recent years. We will talk about the environmental rules governing air, land, and water quality as they apply to farmers, ranchers and rural landowners.
Finally, we will address the federal (and state) administrative state and its rules that apply to farming operations. Not only will federal farm programs be addressed, but we will also look at other major federal regulations that apply to farmers and ranchers.

Further Information and How to Register

Information about the course is available here:
https://eis.global.ksu.edu/CreditReg/CourseSearch/Course.do?open=true&sectionId=127126

You can also find information about the text for the course at the following link (including the Table of Contents and the Index):
https://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

If you are an undergraduate student at an institution other than Kansas State, you should be able to enroll in this course and have it count as credit towards your degree at your institution.  Consult with your academic advisor to see how Ag Law and Economics will transfer and align with your degree completion goals.

If you have questions, you can contact me directly, or submit your questions to the KSU Global Campus staff at the link provided above.

I hope to see you in January!

Checkout the postcard (401 KB PDF) containing more information about the course and instructor.

What Difference Does It Make If I Post My Property “No Trespassing”?

Overview

A great deal of farm personal property is out in the open.  From time to time, machinery and equipment may sit outside, and farm tools and supplies may also be out in the open.  Of course, grazing livestock may be outside along with other farm property.  Farm real estate may contain farm ponds, stock water tanks and other potential hazards.  All of this raises concerns about public access to the premises and possible theft of property and potential liability issues.  Similarly, livestock confinement operations have their own unique concerns about who has access to the property.

Does the posting of the property as “No Trespassing” have any legal consequence?  It might.  That’s the topic of today’s post.

Benefits of Posting

Criminal trespass.  One potential benefit of posting property “No Trespassing” is that, in some states, what is otherwise a civil trespass can be converted to a criminal trespass.  A criminal trespass gets the state involved in prosecuting the trespasser, and it might be viewed as having a greater disincentive to trespass than would a civil trespass.  A civil trespass is prosecuted by the landowner personally against the alleged trespasser. 

Search warrant.  Another possible benefit of posting property “No Trespassing” is that it may cause a search warrant to be obtained before the property can be search for potential criminal conduct.  Under the Fourth Amendment to the Constitution, unreasonable searches and seizures are prohibited absent a search warrant that is judicially-approved and supported by probable cause. 

The search warrant issue and the posting of “No Trespassing” signs was the subject of a recent case from Vermont.  In State v. Dupuis, 2018 VT 86 (Vt. Sup. Ct. 2018), a fish and game warden entered the defendant’s property via an adjoining property. The warden found a blind with a salt block and apples nearby.  A rather precarious path through tough timber was used by the warden to avoid detection. The defendant was charged with baiting and taking big game by illegal means. At trial, the defendant and many others testified that there are “no trespassing” and “keep out” signs all around the property and on the gate to the public road. The warden stated that he did not see any of these signs. The defendant motioned to exclude the evidence because the warden never obtained a search warrant.  The defendant claimed that he had a reasonable expectation of privacy throughout his property particularly because of the “No Trespassing” signs. 

The trial court reasoned that the warden’s access to the property was abnormal and did not diminish the defendant’s intent to exclude people from coming onto the property. The trial court granted the defendant’s motion to suppress evidence obtained by the warden during the warrantless search. On appeal, the state Supreme Court affirmed. The State claimed that the defendant did not properly exclude the public and, therefore, did not have an expectation of privacy relating to the regulation of hunting. However, the Supreme Court held that when a landowner objectively demonstrates an intent to maintain privacy of open fields, a search warrant is required. Game wardens must obtain a search warrant, the court determined, whenever a warden seeks to enter property and gather evidence. The defendant’s posting of “No Trespassing” signs created an expectation of privacy. Accordingly, the evidenced obtained in the warrantless search was properly suppressed. 

Conclusion

The Vermont case points out that posting property as “No Trespassing” can, indeed, have its benefits. Also, it’s important to check state law requirements for the type, size, placement and content of signs.  State rules vary and they must be complied with to properly post your property.  Just another thing to think about in the world of agricultural law. 

Establishing the Elements of a Cruelty to Animals Charge

Overview

Many states criminalize the intentional killing, injuring, maiming, torturing or mutilating of any animal.  In some states, simply abandoning or leaving an animal in any place without making provisions for its proper care or having physical custody of an animal and failing to provide food, potable water, protection from the elements, opportunity for exercise and other care, as is needed for the health or well-being of the animal is criminal.

But, what must the state prove to make a cruelty to animals charge stick?  That issue came up in a recent case and is the topic of today’s post. 

Common Elements

Typically, the state must prove that the defendant acted with depraved intent.  Cruelty to animals is typically classified as a misdemeanor carrying a penalty of up to six months in jail and/or a fine of up to $2,000. Most states do not classify as cruelty to animals accepted veterinary practices and bona fide experiments carried on by commonly recognized research facilities.  In many of the western states, rodeo practices accepted by the Rodeo Cowboy's Association are statutorily determined not to constitute cruelty to animals as well as the humane killing of an animal which is diseased or disabled beyond recovery for any useful purpose or for population control by the animal's owner.  Normal or accepted practices of animal husbandry do not constitute cruelty to animals with respect to farm animals, and killing an animal that is found injuring or posing a threat to another person, farm animal or property is also permitted.

Recent Case

In Cadwell v. State, No. 06-17-00227-CR 2018 Tex. App. LEXIS 4545 (Tex. Ct. App. Jun. 21, 2018), the defendant and his estranged wife were involved in divorce proceedings and during that time various horses belonging to them that had been ordered into the defendant’s custody lost weight, reportedly due to inadequate nutrition. The defendant’s estranged wife as well as two other investigators and animal control officers all testified that the horses were in very bad condition with ribs showing and cracked and had split hooves due to malnutrition. The investigator testified that the horses were kept in an enclosure that had “virtually no grass,” and that grass that was present was too short for them to eat. All the bushes and shrubs had been picked clean. The water troughs within that enclosure were empty and had only leaves and debris in them or had been overturned. A stock tank or pond had water, but it was filled with debris and was stagnant. In addition, there was no evidence of hay found in the horses’ enclosure. The state’s expert witness was a veterinarian with 11 years’ experience. She explained that there is a body scoring scale from one (extremely emaciated) to nine or ten (being extremely obese). In addition, she explained that the acceptable range for a horse is four to six. A horse that is scored under four is in a condition that needs to be addressed. A horse scored at three on this scale is considered thin, while a score of two would indicated that a horse is badly emaciated but standing, while a one indicates extreme emaciation, not able to stand, and not considered savable. She testified that when she saw them the majority of the horses were scored at a three. She also testified that she was surprised with the relatively low parasite presence in most of them and concluded that the most likely reason for the horses’ thinness was that they were not being fed properly.

Ultimately, the defendant was convicted of cruelty to livestock animals and sentenced to 180 days in jail (which was changed to 24 months on the condition that the defendant serve 30 days in jail). The defendant appealed on the basis that there the state failed to prove that he had the criminal intent (mens rea) to harm the animals.  The appellate court determined that evidence could lead a rational jury to find beyond a reasonable doubt that the defendant was intentional or knowing in not providing one or more of the horses in his care enough nutrition.

The defendant also claimed that by inserting “by neglect” in the information and the jury charge, the State and the trial court, improperly instructed the jury and improperly lowered the mens rea requirement from intentionally or knowingly to a lower level of mens rea. However, the appellate court determined that the phrase “by neglect” charges the defendant with cruelty to animals by the manner and means of failure to act or of behavior that was not attentive to the needs of the horses, not with negligently doing so, especially given that the mens rea was specified in both the information and in the jury charge as intentional or knowing. Thus, the appellate court held that because the use of the phrase “by neglect” set out the manner and means of committing the offense and because the information and the jury charge clearly set out the required mens rea of intentional or knowing behavior by the defendant, the use of the phrase did not improperly reduce the State’s burden to prove the defendant’s willful or knowing mens rea. 

Conclusion

Generally accepted farming practices do not constitute animal cruelty.  Generally, providing adequate food and shelter is required, but some states have little to no shelter requirements in certain situations and with respect to certain types of livestock.  The statutory rules vary from state to state. 

Agricultural Law and Economics Conference

Overview

Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture.  The event will be held in Manhattan at the Kansas Farm Bureau headquarters.  The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics.  The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics.  That event will be on the KSU campus in Manhattan.  The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.  

Symposium

This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills. 

The symposium can also be attended online.  For a complete description of the sessions and how to register for either in-person or online attendance, click here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Risk and Profit Conference

On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus.  The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture.  One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis.  The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law.  For a complete run down of the conference, click here:  https://www.agmanager.info/risk-and-profit-conference

Conclusion

The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic.  If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan.  See you there, or online for Day 1.

Curtilage – How Much Ag Property Is Protected From a Warrantless Search?

Overview

The Fourth Amendment protects against illegal searches and seizures.  In general, government officials must secure a search warrant based on probable cause before searching an area unless the owner gives consent.  However, the Fourth Amendment’s protection accorded to “persons, houses, papers and effects,” does not extend to all open areas contiguous to a person’s home, but rather only to the home itself and its surrounding curtilage.  Curtilage is generally defined as the land immediately surrounding an individual’s home or dwelling, including any closely associated buildings and structures, but not any “open fields” or buildings or structures that contain separate activities conducted by others.  For example, in United States v. Ritchie, 312 Fed. Appx. 885 (9th Cir. 2009), the court held that a trailer used occasionally as a place to sleep while performing farm chores did not constitute a “home” for purposes of establishing a Fourth Amendment protection in the curtilage of the home. 

The scope and extent of curtilage is an important issue to farming and ranching operations – much of the business occurs in the “open.”  Are those areas subject to warrantless searches?  It’s an issue that comes up more than one might think, particularly with respect to possible environmental crimes.

Curtilage and Agriculture

Multi-factor test.  The extent of the curtilage is defined with reference to the proximity to the home of the area claimed to be curtilage, whether the area is included within an enclosure surrounding the home, the nature of the uses to which the area is put, and the steps taken by the resident to protect the area from observation by passersby.  These are known as the “Dunn factors” based on United States v. Dunn, 480 U.S. 294 (1987).  One key case applying the factors was United States v. Gilman, No. 06-00198 SOM, 2007 U.S. Dist. LEXIS 32524 (D. Haw. May 2, 2007), aff’d, sub nom., United States v. Terragna, 390 Fed. Appx. 631 (9th Cir. 2010), cert. den., Terragna v. United States, 562 U.S. 1191 (2011).  In this case, which turned the typical curtilage analysis on its head, the court held that all evidence that was seized from a shed was to be suppressed because the shed was not within the curtilage of the residence for which a search warrant had been issued.  The court reasoned that the home and shed were not enclosed by a fence or natural boundary, and there was no evidence that the shed was used for illegal activities.  In addition, the court noted that the defendant took no steps to prevent the observation of the shed from passersby.

Another instructive case applying the Dunn factors is Wilson v. Florida, 952 So. 2d 564 (Fla. Ct. App. 2007).  In that case, a warrantless search was allowed of a greenhouse that was not within the curtilage of the defendant’s home.  The greenhouse was used to manufacture controlled substances.  It was not locked and was made of semitransparent materials.  The court determined that there was no reasonable expectation of privacy with respect to the greenhouse to which the protection against an illegal search and seizure extended.

The “open fields doctrine.”  Obviously, a great deal of farming and ranching activities occurs in the “open” and the courts have held that, under the “open fields doctrine,” that government officials can make warrantless searches of such areas.  Here’s a sample of some of the more prominent cases involving the doctrine:

• In United States v. Kirkwood, No. CR11-5488RBL, 2012 U.S. Dist. LEXIS 65214 (W.D. Wash. May 9, 2012), an open clearing near a rural home that separated the home and outbuildings from a wooded area functioned as curtilage. The court determined that the area was suitable for activities associated with the home and the use of the area associated with the home.
• In Westfall v. State, 10 S.W.3d 85 (Tex. Ct. App. 1999), a sheriff entered a pasture without a warrant. The sheriff seized cattle and charged the owner with cruelty to animals.  The warrantless search was challenged, but was upheld under the open fields doctrine.
• In Trimble v. State, 842 N.E.2d 798 (Ind. 2006), the court upheld a conviction for cruelty to a dog even though the police did not have a search warrant to search the defendant’s home.  While the dog house was within the curtilage of the home, the court determined that the defendant had no expectation of privacy because the dog was visible from the route any visitors to the property would be expected to use.
• In Hill v. Commonwealth, 47 Va. App. 442, 624 S.E.2d 666 (2006), the court upheld convictions for violations of the Virginia Food Act even though an administrative inspection of the defendant’s goat cheese manufacturing facility was conducted without a search warrant. The court determined that the state had a significant interest in protecting public health and that even though the facility was located within the curtilage of the defendant’s home, it was subject to search because it was functioning as commercial property.
• In United States v. Boyster, 436 F.3d 986 (8th Cir. 2006), open fields were found not to be within the curtilage of the defendant’s home. The fields were within the plain view of an aerial flyover and were 100 yards from the defendant’s residence and not enclosed by a fence and no other precautions had been taken to keep the growing marijuana from being visible by others.  Thus, the fields were not protected by the Fourth Amendment.
• In State v. Nance, 149 N.C. App. 734, 562 S.E.2d 557 (N.C. Ct. App. 2002), a warrantless search was upheld under the open fields doctrine, where the animals observed were in plain view from the nearby road. However, the court noted that the seizure of items in plain view may require a warrant absent exigent circumstances.

Recent Case

The scope of curtilage in an ag setting was recently before another court – this time the Ohio Court of Appeals.  In State v. Powell, No. 27580, 2017 Ohio App. LEXIS 5096 (Ohio Ct. App. Nov. 22, 2017), the defendant was charged with seven counts of cruelty to animals. A humane agent for the local Humane Society testified that she was constantly getting complaints, both from the public, next door neighbors, news and also from the County Sherriff’s Office regarding the defendant’s horse not being fed and a pig being stuck. The agent testified that she responded to the area based upon only seeing two of the three horses she knew were normally on the property. The agent also testified that she heard the pigs squealing and followed the sound of animal distress, a sound which she recognized through her experiences as a humane agent. She stated that she first observed the pigs on January 3, 2017. At this time, they were standing in “liquid mud” and she smelled “fecal and urine ammonia” coming from the pen. Fecal and urine ammonia is toxic to pigs. She further stated that pigs were at risk of hypothermia due to the cold weather. The agent spoke with the defendants concerning the condition of the pig pen and the fact that it needed to be remedied along with the pigs’ food and water. The humane agent stated that she and the defendants agreed on a timetable for these items to be remedied. The defendants stated that they would work on it through the week remedy the situation in a timely manner, and that the pigs would be provided food and water. The humane agent testified that when she returned to the property the next day, the pigs were in the same condition and the weather was getting colder. Finally, on her third trip to the property, the humane agent stated the pigs lacked food and fresh water, and that they were “actively freezing to death.” The outside temperature had fallen to six degrees, according to the humane agent. The humane agent arranged for the removal of the pigs from the property on January 7, 2017 at around 12:30am.

The defendant filed a motion to suppress the evidence obtained by the humane agent as the result of an illegal warrantless search of the curtilage surrounding their home. The trial court sustained the defendant’s motion to suppress and the state appealed. On appeal, the appellate court reversed. The appellate court noted that while curtilage is considered to be part of a defendant’s home and, as such, is entitled to Fourth Amendment protection, the agent’s testimony revealed that the home on the property was uninhabitable due to a collapsed roof and no windows. In addition, the evidence showed that the pig pen was 100 yards from the vacant home, and the pig pen was not in an enclosure surrounding the vacant home. There also was no evidence that steps had been taken to protect the area from observation from the adjacent lane, such as the erection of a privacy fence, locked gates or “No Trespassing” signs. Thus, the court concluded that the pig pen was not within the defendant’s residence or its curtilage, and that the defendant’s observation of the pigs was not a “search” for purposes of the Fourth Amendment. Accordingly, the trial court’s judgment was reversed and the matter remanded for further proceedings. 

Conclusion

Warrantless searches can be an important issue for farmers and ranchers, particularly with respect to the possibility of inadvertent violations of the criminal provisions of environmental laws.  It’s helpful to know when a search warrant is required. 

What Problems Does The Migratory Bird Treaty Act Pose For Farmers, Ranchers and Rural Landowners?

Overview

The Migratory Bird Treaty Act (MBTA) 16 U.S.C. § 703 et seq. (2008). protects migratory birds that are not necessarily endangered and, thereby, protected under the Endangered Species Act.  The MBTA is important to agricultural producers and rural landowners because it has been broadly interpreted such that routine daily activities can become subject to the MBTA and create criminal liability at the hands of the U.S. government.      

The Scope of the MBTA

What does “take” mean?  The MBTA makes it unlawful at any time, by any means or in any manner, to “take” any migratory bird.  “Take is defined to mean “pursue, hunt, shoot, wound, kill, trap, capture or collect any migratory bird. 16 U.S.C. §§ 703-712 (2008); 50 C.F.R. §10.12.  Practically all bird species in the United States are covered due to regulations developed by the U.S. Fish and Wildlife Service (FWS) that apply the MBTA to species that don’t even migrate internationally or even at all.  50 C.F.R. §10.13.   

The Act is not limited to covering only hunting, trapping and poaching activities, but extends to commercial activities that kill migratory birds absent an MBTA permit.  The Act prohibits taking or killing of migratory birds (including a nest or egg) at any time, by any means or in any manner.  That could include such conduct as operating oil and gas production facilities, aerogenerators, cell towers as well as commercial forestry and common agricultural activities.  16 U.S.C. §703. However, the courts are split on whether the MBTA applies strictly to truly migratory bird deaths that are not inadvertent (see, e.g., United States v. Citgo Petroleum Corporation, 801 F.3d 477 (5th Cir. 2015)) or deaths of a broader classification of birds that are killed only inadvertently. 

Type of crime.  Violation of the MBTA is a misdemeanor punishable by fine up to $500 and imprisonment up to six months. 16 U.S.C. § 707(a) (2008), as amended by 18 U.S.C. §§3559; 3571.  Anyone who knowingly takes a migratory bird and intends to, offers to, or actually sells or barters a migratory bird is guilty of a felony, with fines up to $2,000, jail up to two years, or both.

Strict liability?  The MBTA is a strict liability statute, and has been applied to impose liability on farmers who inadvertently poison migratory birds by use of pesticides.  While the MBTA is a strict liability statute, constitutional due process requirements must still be satisfied before liability can be imposed.  In other words, there still must be an affirmative act that causes the migratory bird deaths.  For example, in United States v. Apollo Energies, Inc., et al., 611 F.3d 679 (10th Cir. 2010), oil drilling operators were not liable for deaths of migratory birds under the MBTA to the extent that the operators did not have adequate notice or a reasonable belief that their conduct violated the MBTA.  Likewise, in United States v. Rollins, 706 F. Supp. 742 (D. Idaho 1989), a farmer was prosecuted for violating the MBTA when he used a mixture of granular pesticides on an alfalfa field. The chemicals poisoned a flock of geese and killed several of them.  The trial court held that even though the farmer had not applied the pesticide in a negligent manner and could not control the fact that the geese would land and eat the granules, liability under the MBTA was based on whether the farmer knew that the land was a known feeding area for geese.  The trial court concluded that “a reasonable person would have been placed on notice that alfalfa grown on Westlake Island in the Snake River would attract and be consumed by migratory birds.”  The trial court was reversed on appeal on the grounds that the MBTA was too vague to give the farmer adequate notice that his conduct would likely lead to the killing of the protected birds since the farmer's past experience with the pesticide and the geese was that it did not kill them.  But, in United States v. Van Fossan, 899 F.2d 636 (7th Cir. 1990), the court confirmed the notion that the MBTA is a strict liability statute and approved its application to a defendant who used pesticides to poison birds, even though the defendant did not know that his use of the pesticide would kill migratory birds protected under the Act.

“Baiting” of birds.  The MBTA also prohibits the taking of migratory game birds by the aid of “baiting”.  However, it is permissible to take migratory game birds, including waterfowl, on or over standing crops, flooded harvested croplands, grain crops that have been properly shocked on the field where grown, or grains found scattered solely as the result of normal agricultural planting or harvesting.  See 50 C.F.R. §§ 20.11(g); 20.21(i)(2008).  The FWS has promulgated regulations defining “normal agricultural planting” and “harvesting,” and in Falk v. United States Fish and Wildlife Service, 452 F.3d 951 (8th Cir. 2006), the court held that FWS determinations that harvesting corn after December 1 and aerial seeding of winter wheat in standing corn were not “normal planting” and that the landowners were barred from hunting next to the neighbors’ baited fields were a reasonable interpretation of the MBTA.

Some states also have statutes that prohibit the baiting of wildlife for hunting purposes unless the alleged baiting was the result of commonly accepted agricultural practices.  For instance, in State v. Hansen, 805 N.W.2d 915 (Minn. Ct. App. 2011), the defendant’s conviction for using bait to hunt deer was reversed.  The court held that the state statute violated due process because it was vague as applied to the defendant’s pumpkin patch operation.  The law did not distinguish between normally accepted agricultural practices and the unlawful baiting of deer.

In addition, the Act permits the taking of all migratory game birds, except waterfowl, on or over any lands where shelled, shucked, or unshucked corn, wheat or other grain, salt, or other feed has been distributed or scattered as the result of bona fide agricultural operations or procedures.  In United States v. Adams, 383 Fed. Appx. 481 (5th Cir. 2010), a farmer was convicted of violating the Act for hunting doves on a field that he had recently planted to wheat.  For purposes of the “baiting” provision of the Act, the trial court judge determined that intent was not an element of the offense for which the farmer was convicted and did not allow the farmer to introduce evidence concerning the procedures commonly used to plant winter wheat in northeast Louisiana.  On appeal, the Fifth Circuit Court of Appeals reversed the trial court, holding instead that the government was required to prove that the farmer’s intentions were not in good faith and that the farmer’s acts were merely a sham to attract migratory birds to hunt.  Accordingly, the court reversed the farmer’s conviction and rendered acquittal based on the court’s determination that the farmer was entitled to have the lower court consider the evidence of his good faith in growing the wheat, and because there was no evidence from which a jury could find that the farmer’s planting was not the result of a “bona fide agricultural operation or procedure.”  In another case, United States v. Andrus, 383 Fed. Appx. 481 (5th Cir. 2010), the court determined that the use of a stripper header to harvest milo was not a "normal agricultural practice" with the result that the defendant's sentence for taking migratory birds by aid of bait in violation of the MTBA was upheld.  The defendant's testimony that he could not reasonably have been expected to know that the field he was hunting in was baited because he was not a farmer was not credible.  The court noted that the defendant failed to inspect the field and that unharvested milo was clearly present near the defendant's duck blinds and decoys.

Migratory bird facilities.  The MBTA regulations specify that “no migratory bird preservation facility shall receive or have in custody any migratory game birds unless such birds are tagged.  See, e.g., 50 C.F.R. § 20.36.  The requirement has been held to apply to an individual.  See, e.g., United States v. Gilkerson, 556 F.3d 854 (8th Cir. 2009).

Conclusion

Supposedly, the FWS (the enforcing agency of the MBTA) is only interested in enforcing the MBTA on activities that “chronically” kill protected birds, and then only after notice has been given to the alleged offending party.  80 Fed. Reg. 30034 (May 26, 2015).  But, that might be of little assurance to farmers, ranchers, rural landowners and others whose fate could be left up to FWS discretion and the interpretation of the MBTA by the courts where interpretations can differ by jurisdiction. 

The Business of Agriculture – Upcoming CLE Symposium

Overview

On September 18, Washburn School of Law will be having its second annual CLE conference in conjunction with the Agricultural Economics Department at Kansas St. University.  The conference, hosted by the Kansas Farm Bureau (KFB) in Manhattan, KS, will explore the legal, economic, tax and regulatory issue confronting agriculture.  This year, the conference will also be simulcast over the web.

That’s my focus today – the September 18 conference in Manhattan, for practitioners, agribusiness professionals, agricultural producers, students and others. 

Symposium Topics

Financial situation.  Midwest agriculture has faced another difficult year financially.  After greetings by Kansas Farm Bureau General Counsel Terry Holdren, Dr. Allen Featherstone, the chair of the ag econ department at KSU will lead off the day with a thorough discussion on the farm financial situation.  While his focus will largely be on Kansas, he will also take a look at nationwide trends.  What are the numbers for 2017?  Where is the sector headed for 2018? 

Regulation and the environment.  Ryan Flickner, Senior Director, Advocacy Division, at the KFB will then follow up with a discussion on Kansas regulations and environmental laws of key importance to Kansas producers and agribusinesses. 

Tax – part one.  I will have a session on the tax and legal issues associated with the wildfire in southwest Kansas earlier this year – handling and reporting losses, government payments, gifts and related issues.  I will also delve into the big problem in certain parts of Kansas this year with wheat streak mosaic and dicamba spray drift.

Weather.  Mary Knapp, the state climatologist for Kansas, will provide her insights on how weather can be understood as an aid to manage on-farm risks.  Mary’s discussions are always informative and interesting. 

Crop Insurance.  Dr. Art Barnaby, with KSU’s ag econ department, certainly one of the nation’s leading experts on crop insurance, will address the specific situations where crop insurance does not cover crop loss.  Does that include losses caused by wheat streak mosaic?  What about losses from dicamba drift?

Washburn’s Rural Law Program.  Prof. Shawn Leisinger, the Executive Director of the Centers for Excellence at the law school (among his other titles) will tell attendees and viewers what the law school is doing (and planning to do) with respect to repopulating rural Kansas with well-trained lawyers to represent the families and businesses of agriculture.  He will also explain the law school’s vision concerning agricultural law and the keen focus that the law school has on agricultural legal issues.

Succession Planning.  Dr. Gregg Hadley with the KSU ag econ department will discuss the interpersonal issues associated with transitioning the farm business from one generation to the next.  While the technical tax and legal issues are important, so are the personal family relationships and how the members of the family interact with each other.

Tax – part two.  I will return with a second session on tax issues.  This time my focus will be on hot-button issues at both the state and national level.  What are the big tax issues for agriculture at the present time?  There’s always a lot to talk about for this session.

Water.  Prof. Burke Griggs, another member of our “ag law team” at the law school, will share his expertise on water law with a discussion on interstate water disputes, the role of government in managing scarce water supplies, and what the relationship is between the two.   What are the implications for Kansas and beyond?

Producer panel.  We will close out the day with a panel consisting of ag producers from across the state.  They will discuss how they use tax and legal professionals as well as agribusiness professionals in the conduct of their day-to-day business transactions.

Conclusion

The Symposium is a collaborative effort of Washburn law, the ag econ department at KSU and the KFB.  For lawyers, CPAs and other tax professionals, application has been sought for continuing education credit.  The symposium promises to be a great day to interact with others involved in agriculture, build relationships and connections and learn a bit in the process.

We hope to see you either in-person or online.  For more information on the symposium and how to register, check out the following link:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

The Necessity Defense To Criminal Liability

In general, the law only punishes those individuals who have the capacity to make a moral choice of whether to engage in the prohibited behavior.  Consequently, insane persons who commit crimes are generally believed to lack the moral fault necessary for punishment.  Similarly, persons below a certain age are deemed to lack the full capacity for criminal liability and are typically liable only as juvenile delinquents.  Likewise, those who commit crimes while voluntarily intoxicated are liable for their behavior, though sometimes at a lesser level.

Sometimes, however, conduct that would otherwise constitute a crime is not because it is deemed necessary.  That’s an issue that sometimes arises in agriculture.

Necessity - Defined

The Model Penal Code (MPC) states that conduct that is believed to be necessary to avoid a harm or evil to oneself or to another is justifiable, provided that the harm or evil sought to be avoided is greater than that sought to be prevented by the law defining the offense charged, and the law does not provide another exception or defense.  Under a necessity defense, for example, property may be destroyed to prevent the spread of a fire or a speed limit may be violated in pursuing a suspected criminal.

In 1884, in a case brought before the Queen's Bench in England, the court completely rejected the necessity defense.  R. v. Dudley & Stephens, 15 Cox Crim. Cas. 624 (QB 1884). The defendants, while adrift on a lifeboat about 1,000 miles from land, killed a weak and sick boy, and fed upon his body to avoid their own death by starvation.  The Queen's Bench found that this act constituted willful murder and sentenced the defendants to death, the only penalty then available for murder.  Later, the Crown commuted the sentence to six-months imprisonment.  In the United States, however, the approach of the English court has been rejected.

Wyoming Case

In a prominent Wyoming Supreme Court decision in 1962 (Cross v. State, 370 P.2d 371 (Wyo. 1962)), the court found the defendant not guilty of illegally shooting game animals in defense of his property due to the constitutional guarantee that one cannot be deprived of property without due process of law.  Under the facts of the case, a rancher was charged on six counts for various acts associated with shooting two moose in violation of Wyoming law.  He plead not guilty, but the jury found him guilty on all of the charges.  The problem stemmed from a large herd of wild game in a nearby refuge that followed natural water courses and creek bottoms in the winter time in search of food that caused them to ultimately gather on the defendant’s ranch.  The wild game, including a large herd of moose, did serious and substantial damage to the defendant’s ranch by consuming pasture and other forage that was for the defendant’s livestock.  The wild game also prevented the production of hay and other natural grasses on the defendant’s ranch, as well as destroying fences.  Overall, the defendant’s ranching operations were substantially interrupted. 

Because of these problems, the defendant sought help from the Wyoming State Game and Fish Department, and ultimately ended up in litigation designed to induce the Department to enforce sufficient controls to protect his ranch and residents in the area.  The Department and the defendant took various measures to keep the moose away, but to no avail.  The two moose at issue were in feeding in the defendant’s meadow and he tried to “spook” them away.  One of them ran into his fence and got entangled in the wire.  When the moose tried to free itself, it instead tore down a considerable amount of good fence.  The defendant shot the moose to protect his property from further destruction.

After being charged, the defendant plead that he was justified in protecting his private property.  While the trial court disagreed with the defendant, the Wyoming Supreme Court reversed and dismissed the complaint.  The state claimed that the defendant had violated the state’s game law.  However, the Wyoming Supreme Court noted that the power of the state cannot conflict with constitutional provisions.  Framed that way, the issue was whether the state could bar the defendant from protecting his property from the depredations of wild animals.  The court determined that the defendant should not be penalized because the killing of the moose was reasonable necessary (based on the facts) for the protection of his private property.  The court did emphasize that before force can be taken to protect one’s property from wild animals that are protected by law, a person must use every available before killing the animals.  Then, the property owner can use only such force as is reasonably necessary and suitable to protect the private property and that force must be what a reasonably prudent person would use under the circumstances. 

Defending Property – Generally

In certain parts of the United States damage to crops, poultry and livestock by wildlife is a significant concern.  All states have criminal statutes that prohibit the taking of protected wildlife out of season and without a license.  However, a broader question is whether such a statute violates a state Constitutional provision vesting state citizens with certain inalienable rights – including the right to protect one’s property. For instance, the Iowa Constitution provides that, "All men and women are, by nature, free and equal, and have certain inalienable rights among which are those of enjoying and defending life and liberty, acquiring, possessing and protecting property, and pursuing and obtaining safety and happiness.”  Iowa Const. art. I, §1.

The Constitutional defense of property provisions most often make a difference in cases where the defendant claims a right to kill wild animals to protect property.  Courts considering these cases have read the right to protect property as a judicially enforceable constitutional right that trumps state statutes and regulations.  The longest line of such cases comes from Pennsylvania, where, from 1917 to 2000, the courts held that the constitutional right to protect property entitles landowners and their agents to kill wild animals that are threatening the landowner's crops, and that it is unconstitutional for state game laws barring the killing of wild animals to be applied in such situations.  Courts from Iowa, Kentucky, Montana, New Hampshire, and Ohio have taken the same view.  Courts from Alabama, South Carolina, Washington, and Wyoming have taken this view even though the respective state constitutions do not have an express provision for the protection of property. 

In a 1997 Ohio case, State v. Troyer, No. 97CA0015, 1997 Ohio App. LEXIS 5207 (Ohio Ct. App. Nov. 19, 1997), the defendant’s primary source of income was from the raising of exotic and domestic birds on his farm.  To combat the threat from great horned owls preying on his birds, the defendant erected traps at various locations on the farm near where his birds were located.  He was charged and convicted of violating a state statute which provided that “…hawks or owls causing damage to domestic animals or fowl may be killed by the owner of the domestic animal or fowl while such damage is occurring.”  The State claimed that the defendant was attempting to take or kill an owl at a time when damage to his property was not occurring.  The defendant claimed that waiting until an owl had actually caught one of his birds in its beak would be too late to prevent damage to his property.  On appeal, his conviction was reversed on the basis that the statute unconstitutionally abridged the defendant’s right to protect his property.  The court noted that the statute should be construed in such a manner to allow the defendant to use such force as is reasonably necessary to protect his property from predatory owls.

Under the MPC, the necessity defense is limited to those situations where the harm or evil sought to be avoided is greater than that sought to be prevented by the law defining the offense charged, and a legislative purpose to exclude the justification claimed does not plainly appear.  MPC §3.02

Conclusion

It is certainly frustrating for farmers, ranchers and rural landowners to have property damaged or destroyed by wildlife.  If the wildlife are protected game under state law, it’s important to know your rights before taking action to remedy the situation. 

Top Ten Agricultural Law Developments of 2016 (Five Through One)

Overview

Today we continue our look this week at the biggest developments in agricultural law and taxation during 2016.  Out of all of the court rulings, IRS developments and regulatory issues, we are down to the top five developments in terms of their impact on ag producers, rural landowners and agribusinesses. 

So, here are the top five (as I see them) in reverse order:

(5) Pasture Chiseling Activity Constituted Discharge of “Pollutant” That Violated the CWA. The plaintiff bought approximately 2,000 acres in northern California in 2012. Of that 2,000 acres, the plaintiff sold approximately 1,500 acres. The plaintiff retained an environmental consulting firm to provide a report and delineation map for the remaining acres and requested that appropriate buffers be mapped around all wetlands. The firm suggested that the plaintiff have the U.S. Army Corps of Engineers (COE) verify the delineations before conducting any grading activities. Before buying the 2,000 acres, the consulting firm had provided a delineation of the entire tract, noting that there were approximately 40 acres of pre-jurisdictional wetlands. The delineation on the remaining 450 acres of pasture after the sale noted the presence of intact vernal and seasonal swales on the property along with several intermittent and ephemeral drainages. A total of just over 16 acres of pre-jurisdictional waters of the United States were on the 450 acres – having the presence of hydric soils, hydrophytic vegetation and hydrology (1.07 acres of vernal pools; 4.02 acres of vernal swales; .82 acres of seasonal wetlands; 2.86 acres of seasonal swales and 7.40 acres of other waters of the United States). In preparation to plant wheat on the tract, the property was tilled at a depth of 4-6 inches to loosen the soil for plowing with care taken to avoid the areas delineated as wetlands. However, an officer with the (COE) drove past the tract and thought he saw ripping activity that required a permit. The COE sent a cease and desist letter and the plaintiff responded through legal counsel requesting documentation supporting the COE’s allegation and seeking clarification as to whether the COE’s letter was an enforcement action and pointing out that agricultural activities were exempted from the CWA permit requirement. The COE then provided a copy of a 1994 delineation and requested responses to numerous questions. The plaintiff did not respond. The COE then referred the matter to EPA for enforcement. The plaintiff sued the COE claiming a violation of his Fifth Amendment right to due process and his First Amendment right against retaliatory prosecution. The EPA refused the referral due to the pending lawsuit so the COE referred the matter to the U.S. Department of Justice (DOJ). The DOJ filed a counterclaim against the plaintiff for CWA violations.

The court granted the government’s motion on the due process claim because the cease and desist letter did not initiate any enforcement that triggered due process rights. The court also dismissed the plaintiff’s retaliatory prosecution claim. On the CWA claim brought by the defendant, the court determined that the plaintiff’s owner could be held liable as a responsible party. The court noted that the CWA is a strict liability statute and that the intent of the plaintiff’s owner was immaterial. The court then determined that the tillage of the soil causes it to be “redeposited” into delineated wetlands. The redeposit of soil, the court determined, constituted the discharge of a “pollutant” requiring a national pollution discharge elimination system (NPDES) permit. The court reached that conclusion because it found that the “waters” on the property were navigable waters under the CWA due to a hydrological connection to a creek that was a tributary of Sacramento River and also supported the federally listed vernal pool fairy shrimp and tadpole shrimp. Thus, a significant nexus with the Sacramento River was present. The court also determined that the farming equipment, a tractor with a ripper attachment constituted a point source pollutant under the CWA. The discharge was not exempt under the “established farming operation” exemption of 33 U.S.C. §1344(f)(1) because farming activities on the tract had not been established and ongoing, but had been grazed since 1988. Thus, the planting of wheat could not be considered a continuation of established and ongoing farming activities. Duarte Nursery, Inc. v. United States Army Corps of Engineers, No. 2:13-cv-02095-KJM-AC, 2016 U.S. Dist. LEXIS 76037 (E.D. Cal. Jun. 10, 2016).

(4) Prison Sentences Upheld For Egg Company Executives Even Though Government Conceded They Had No Knowledge of Salmonella Contamination. The defendant, an executive of a large-scale egg production company (trustee of the trust that owned the company), and his son (the Chief Operating Officer of the company) pled guilty as “responsible corporate officers” to misdemeanor violations of 21 U.S.C. §331(a) for introducing eggs that had been adulterated with salmonella into interstate commerce from the beginning of 2010 until approximately August of 2010. They each were fined $100,000 and sentenced to three months in prison. They appealed their sentences as unconstitutional on the basis that they had no knowledge that the eggs at issue were contaminated at the time they were shipped. They also claimed that their sentences violated Due Process and the Eighth Amendment insomuch as the sentences were not proportional to their “crimes.” They also claimed that incarceration for a misdemeanor offense would violate substantive due process.

The trial court determined that the poultry facilities were in poor condition, had not been appropriately cleaned, had the presence of rats and other rodents and frogs and, as a result, the defendant and his son either “knew or should have known” that additional salmonella testing was needed and that remedial and preventative measures were necessary to reduce the presence of salmonella. The appellate court agreed, finding that the evidence showed that the defendant and son were liable for negligently failing to prevent the salmonella outbreak and that 21 U.S.C. §331(a) did not have a knowledge requirement. The appellate court also did not find a due process violation. The defendant and son claimed that because they did not personally commit wrongful acts, and that due process is violated when prison terms are imposed for vicarious liability felonies where the sentence of imprisonment is only for misdemeanors. However, the court held that vicarious liability was not involved, and that 21 U.S.C. §331(a) holds a corporate officer accountable for failure to prevent or remedy “the conditions which gave rise to the charges against him.” Thus, the appellate court determined, the defendant and son were liable for negligently failing to prevent the salmonella outbreak. The court determined that the lack of criminal intent does not violate the Due Process Clause for a “public welfare offense” where the penalty is relatively small (the court believed it was), the defendant’s reputation was not “gravely” damaged (the court believed that it was not) and congressional intent supported the penalty (the court believed it did). The court also determined that there was no Eighth Amendment violation because “helpless” consumers of eggs were involved. The court also found no procedural or substantive due process violation with respect to the sentences because the court believed that the facts showed that the defendant and son “had reason to suspect contamination” and should have taken action to address the problem at that time (even though law didn’t require it).

The dissent pointed out that the government stipulated at trial that its investigation did not identify any corporate personnel (including the defendant and son) who had any knowledge that eggs sold during the relevant timeframe were contaminated with salmonella. The dissent also noted that the government conceded that there was no legal requirement for the defendant or corporation to comply with stricter regulations during the timeframe in issue. As such, the convictions imposed and related sentences were based on wholly nonculpable conduct and there was no legal precedent supporting imprisonment in such a situation. The dissent noted that the corporation “immediately, and at great expense, voluntarily recalled hundreds of millions of shell eggs produced” at its facilities when first alerted to the problem. As such, according to the dissent, due process was violated and the sentences were unconstitutional. United States v. Decoster, 828 F.3d 626 (8th Cir. 2016).

(3) The IRS and Self-Employment Tax. Two self-employment tax issues affecting farmers and ranchers have been in the forefront in recent years – the self-employment tax treatment of Conservation Reserve Program (CRP) payments and the self-employment tax implications of purchased livestock that had their purchase price deducted under the de minimis safe harbor of the capitalization and repair regulations. On the CRP issue, in 2014 the U.S. Court of Appeals ruled that CRP payments in the hands of a non-farmer are not subject to self-employment tax. The court, in Morehouse v. Comr., 769 F.3d 616 (8th Cir. 2014), rev’g, 140 T.C. 350 (2013), held the IRS to its historic position staked out in Rev. Rul. 60-32 that government payments attributable to idling farmland are not subject to self-employment tax when received by a person who is not a farmer. The court refused to give deference to an IRS announcement of proposed rulemaking involving the creation of a new Rev. Rul. that would obsolete the 1960 revenue ruling. The IRS never wrote the new rule, but continued to assert their new position on audit. The court essentially told the IRS to follow appropriate procedure and write a new rule reflecting their change of mind. In addition, the court determined that CRP payments are “rental payments” statutorily excluded from self-employment tax under I.R.C. §1402(a). Instead of following the court’s invitation to write a new rule, the IRS issued a non-acquiescence with the Eighth Circuit’s opinion. O.D. 2015-02, IRB 2015-41. IRS said that it would continue audits asserting their judicially rejected position, even inside the Eighth Circuit (AR, IA, MN, MO, NE, ND and SD).

In 2016, the IRS had the opportunity to show just how strong its opposition to the Morehouse decision is. A Nebraska non-farmer investor in real estate received a CP2000 Notice from the IRS, indicating CRP income had been omitted from their 2014 return. The CP2000 Notice assessed the income tax and SE Tax on the alleged omitted income. The CRP rental income was in fact included on the return, but it was included on Schedule E along with cash rents, where it was not subject to self-employment tax. The practitioner responded to the IRS Notice by explaining that the CRP rents were properly reported on Schedule E because the taxpayer was not a farmer. This put the matter squarely before the IRS to reject the taxpayer’s position based on the non-acquiescence. But, the IRS replied to the taxpayer’s response with a letter informing the taxpayer that the IRS inquiry was being closed with no change from the taxpayer’s initial position that reported the CRP rents for the non-farmer on Schedule E. 

On the capitalization and repair issue, taxpayers can make a de minimis safe harbor election that allows amounts otherwise required to be capitalized to be claimed as an I.R.C. §162 ordinary and necessary business expense. This de minimis expensing election has a limit of $5,000 for taxpayers with an Applicable Financial Statement (AFS) and $2,500 for those without an AFS. Farmers will fall in the latter category. In both cases, the limit is applied either per the total on the invoice, or per item as substantiated by the invoice. One big issue for farmers and ranchers is how to report the income from the sale of purchased livestock that are held for productive use, such as breeding or dairy animals for which the de minimis safe harbor election was made allowing the full cost of the livestock to be deducted. It had been believed that because the repair regulations specify when the safe harbor is used, the sale amount is reported fully as ordinary income that is reported on Schedule F where it is subject to self-employment tax for a taxpayer who is sole proprietor farmer or a member of a farm partnership. In that event, the use of the safe harbor election would produce a worse tax result that would claiming I.R.C. §179 on the livestock.

An alternative interpretation of the repair regulations is that the self-employment tax treatment of the gain or loss on sale of assets for which the purchase price was deducted under the de minimis safe harbor is governed by Treas. Reg. §1.1402(a)-6(a). That regulation states that the sale of property is not subject to selfemployment tax unless at least one of two conditions are satisfied: (1) the property is stock in trade or other property of a kind which would properly be includible in inventory if on-hand at the close of the tax year; or (2) the property is held primarily for sale to customers in the ordinary course of a trade or business. Because purchased livestock held for dairy or breeding purposes do not satisfy the first condition, the question comes down to whether condition two is satisfied – are the livestock held primarily for sale to customers in the ordinary course of a trade or business? The answer to that question is highly fact-dependent. If the livestock whose purchase costs have been deducted under the de minimis rule are not held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, the effect of the regulation is to report the gain on sale on Part II of Form 4797. This follows Treas. Reg. §1.1402(a)-6(a) which bars Sec. 1231 treatment (which would result in the sale being reported on Part I of Form 4797). In that event, the income received on sale would not be subject to self-employment tax.

In 2016, the IRS, in an unofficial communication, said that the alternative interpretation is the correct approach. However, the IRS was careful to point out that the alternative approach is based on the assumptions that the livestock were neither inventoriable nor held for sale, and that those assumptions are highly fact dependent on a case-by case basis. The IRS is considering adding clarifying language to the Farmers’ Tax Guide (IRS Pub. 225) and/or the Schedule F Instructions.

(2) TMDLs and the Regulation of Ag Runoff. Diffused surface runoff of agricultural fertilizer and other chemicals into water sources as well as irrigation return flows are classic examples of nonpoint source pollution that isn’t discharged from a particular, identifiable source. A primary source of nonpoint source pollution is agricultural runoff. As nonpoint source pollution, the Clean Water Act (CWA) leaves regulation of it up to the states rather than the federal government. The CWA sets-up a “states-first” approach to regulating water quality when it comes to nonpoint source pollution. Two key court opinions were issued in 2016 where the courts denied attempts by environmental groups to force the EPA to create additional federal regulations involving Total Maximum Daily Loads (TMDLs). The states are to establish total maximum daily TMDLs for watercourses that fail to meet water quality standards after the application of controls on point sources. A TMDL establishes the maximum amount of a pollutant that can be discharged or “loaded” into the water at issue from all combined sources on a daily basis and still permit that water to meet water quality standards. A TMDL must be set “at a level necessary to implement water quality standards.” The purpose of a TMDL is to limit the amount of pollutants in a watercourse on any particular date. Two federal court opinions in 2016 reaffirmed the principle that regulation of nonpoint source pollution is left to the states and not the federal government.

In Conservation Law Foundation v. United States Environmental Protection Agency, No. 15-165-ML, 2016 U.S. Dist. LEXIS 172117 (D. R.I. Dec. 13, 2016), the plaintiff claimed that the EPA’s approval of the state TMDL for a waterbody constituted a determination that particular stormwater discharges were contributing to the TMDL being exceeded and that federal permits were thus necessary. The court, however, determined that the EPA’s approval of the TMDL did not mean that EPA had concluded that stormwater discharges required permits. The court noted that there was nothing in the EPA’s approval of the TMDL indicating that the EPA had done its own fact finding or that EPA had independently determined that stormwater discharges contributed to a violation of state water quality standards. The regulations simply do not require an NPDES permit for stormwater discharges to waters of the United States for which a TMDL has been established. A permit is only required when, after a TMDL is established, the EPA makes a determination that further controls on stormwater are needed.

In the other case, Gulf Restoration Network v. Jackson, No. 12-677 Section: “A” (3), 2016 U.S. Dist. LEXIS 173459 (E.D. La. Dec. 15, 2016), numerous environmental groups sued the EPA to force them to impose limits on fertilizer runoff from farm fields. The groups claimed that many states hadn’t done enough to control nitrogen and phosphorous pollution from agricultural runoff, and that the EPA was required to mandate federal limits under the Administrative Procedure Act – in particular, 5 U.S.C. §553(e) via §303(c)(4) of the CWA. Initially, the groups told the EPA that they would sue if the EPA did not write the rules setting the limits as requested. The EPA essentially ignored the groups’ petition by declining to make a “necessity determination. The groups sued and the trial court determined that the EPA had to make the determination based on a 2007 U.S. Supreme Court decision involving the Clean Air Act (CAA). That decision was reversed on appeal on the basis that the EPA has discretion under §303(c)(4)(B) of the CWA to decide not to make a necessity determination as long as the EPA gave a “reasonable explanation” based on the statute why it chose not to make any determination. The appellate court noted that the CWA differed from the CAA on this point. On remand, the trial court noted upheld the EPA’s decision not to make a necessity determination. The court noted that the CWA gives the EPA “great discretion” when it comes to regulating nutrients, and that the Congressional policy was to leave regulation of diffused surface runoff up to the states. The court gave deference to the EPA’s “comprehensive strategy of bringing the states along without the use of federal rule making…”.

Also, in 2016 the U.S. Supreme Court declined to review a decision of the U.S. Court of Appeals for the Third Circuit which had determined in 2015 that the EPA had acted within its authority under 33 U.S.C. §1251(d) in developing a TMDL for the discharge of nonpoint sources pollutants into the Chesapeake Bay watershed.  American Farm Bureau, et al. v. United States Environmental Protection Agency, et al., 792 F.3d 281 (3d Cir. 2015), cert. den., 136 S. Ct. 1246 (2016).

(1) The Election of Donald Trump as President and the Potential Impact on Agricultural and Tax Policy. Rural America voted overwhelmingly for President-elect Trump, and he will be the President largely because of the sea of red all across the country in the non-urban areas. So, what can farmers, ranchers and agribusinesses anticipate the big issues to be in the coming months and next few years and the policy responses? It’s probably reasonable to expect that same approach will be applied to regulations impacting agriculture. Those with minimal benefit and high cost could be eliminated or retooled such that they are cost effective. Overall, the pace of the generation of additional regulation will be slowed. Indeed, the President-elect has stated that for every new regulation, two existing regulations have to be eliminated.

Ag policy.  As for trade, it is likely that trade agreements will be negotiated on a much more bi-lateral basis – the U.S. negotiating with one other country at a time rather than numerous countries. The President-elect is largely against government hand-outs and is big on economic efficiency. That bodes well for the oil and gas industry (and perhaps nuclear energy). But, what about less efficient forms of energy that are heavily reliant on taxpayer support? Numerous agricultural states are heavily into subsidized forms of energy with their state budgets littered with numerous tax “goodies” for “renewable” energy.” However, the President-elect won those states. So, does that mean that the federal subsidies for ethanol and biodiesel will continue. Probably. The Renewable Fuels Standard will be debated in 2017, but will anything significant happen? Doubtful. It will continue to be supported, but I expect it to be reviewed to make sure that it fits the market. Indeed, one of the reasons that bio-mass ethanol was reduced so dramatically in the EPA rules was that it couldn’t be produced in adequate supplies. What about the wind energy production tax credit? What about the various energy credits in the tax code? Time will tell, but agricultural interests should pay close attention.

The head of the Senate Ag Committee will be Sen. Roberts from Kansas. As chair, he will influence the tone of the debate of the next farm bill. I suspect that means that the farm bill will have provisions dealing with livestock disease and biosecurity issues. Also, I suspect that it will contain significant provisions crop insurance programs and reforms of existing programs. The House Ag Committee head will be Rep. Conaway from Texas. That could mean that cottonseed will become an eligible commodity for Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). It may also be safe to assume that for the significant Midwest crops (and maybe some additional crops) their reference prices will go up. Also, it now looks as if the I.R.C. §179 issue involving the income limitation for qualification for farm program payments (i.e., the discrepancy of the treatment between S corporations and C corporations) will be straightened out. Other federal agencies that impact agriculture (EPA, Interior, FDA, Energy, OSHA) can be expected to be more friendly to agriculture in a Trump Administration.

Tax policy. As for income taxes, it looks at this time that the Alternative Minimum Tax might be eliminated, as will the net investment income tax that is contained in Obamacare. Individual tax rates will likely drop, and it might be possible that depreciable assets will be fully deductible in the year of their purchase. Also, it looks like the corporate tax rate will be cut as will the rate applicable to pass-through income. As for transfer taxes, President-elect Trump has proposed a full repeal of the federal estate tax as well as the federal gift tax. Perhaps repeal will be effective January 1, 2017, or perhaps it will be put off until the beginning of 2018. Or, it could be phased-in over a certain period of time. Also, while it appears at the present time that any repeal would be “permanent,” that’s not necessarily a certainty. Similarly, it’s not known whether the current basis “step-up” rule would be retained if the estate tax is repealed. That’s particularly a big issue for farmers and ranchers. It will probably come down to a cost analysis as to whether step-up basis is allowed. The President-elect has already proposed a capital gains tax at death applicable to transfers that exceed $10 million (with certain exemptions for farms and other family businesses). Repeal of gift tax along with repeal of estate tax has important planning implications. There are numerous scenarios that could play out. Stay tuned, and be ready to modify existing plans based on what happens. Any repeal bill would require 60 votes in the Senate to avoid a filibuster unless repeal is done as part of a reconciliation bill. Also, without being part of a reconciliation bill, any repeal of the federal estate tax would have to “sunset” in ten years.

Top Ten Agricultural Law and Tax Developments of 2016 (Ten Through Six)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2016.  On Monday, we highlighted the important developments that just missed being in the top ten.  Today we take a look at developments 10 through six.  On Friday, we will look at the top five. 

10. Court Obscures Rational Basis Test To Eliminate Ag Exemption From Workers' Compensation Law. While this is a state Supreme Court decision, its implications are significant. Most, if not all, states have a statutory exemption from workers’ compensation for employers that are engaged in agriculture. The statutory exemption varies in scope from state to state and, of course, an employer that is otherwise exempt can choose to be covered by the statute and offer workers’ compensation benefits to employees. In this case, the plaintiffs claimed that their on-the-job injuries should be covered under the state (NM) workers' compensation law. One plaintiff tripped while picking chile and fractured her left wrist. The other plaintiff was injured while working in a dairy when he was head-butted by a cow and pushed up against a metal door causing him to fall face-first into a concrete floor and sustain neurological damage. The plaintiffs' claims for workers' compensation benefits were dismissed via the exclusion from the workers' compensation system for employers. On appeal, the appellate court reversed. Using rational basis review (the standard most deferential to the constitutionality of the provision at issue), the court interpreted Sec. 52-1-6(A) of the New Mexico Code as applying to the primary job duties of the employees (as opposed to the business of the employer and the predominant type of employees hired), and concluded the distinction was irrational and lacked any rational purpose. The appellate court noted that the purpose of the law was to provide "quick and efficient delivery" of medical benefits to injured and disabled workers. Thus, the court determined that the exclusion violated the constitutional equal protection guarantee. The court further believed that the exclusion for workers that cultivate and harvest (pick) crops, but the inclusion of workers that perform tasks associated with the processing of crops was a distinction without a difference. The appellate court made no mention that the highest court in numerous other states had upheld a similar exclusion for agriculture from an equal protection constitutional challenge.  On further review, the state Supreme Court affirmed. The Court determined that there was nothing to distinguish farm and ranch laborers from other ag employees and that the government interest of cost savings, administrative convenience and similar interests unique to agriculture were not rationally related to a legitimate government interest. The court determined that the exclusion that it construed as applying to ag laborers was arbitrary discrimination. A dissenting judge pointed out that the legislature’s decision to allow employers of farm and ranch laborers to decide for themselves whether to be subject to workers’ compensation or opt out and face tort liability did not violate any constitutionally-protected right. The dissent noted that such ability to opt out was a legitimate statutory scheme that rationally controlled costs for New Mexico farms and ranches, and that 29 percent of state farms and ranches had elected to be covered by workers’ compensation. The dissent also noted that the majority’s opinion would have a detrimental economic impact on small, economically fragile farms in New Mexico by imposing an additional economic cost of $10.5 million annually (as projected by the state Workers’ Compensation Administration). On this point, the dissent further pointed out that the average cost of a claim was $16,876 while the average net farm income for the same year studied was $19,373. The dissent further concluded that the exemption for farming operations was legitimately related to insulating New Mexico farm and ranches from additional costs. In addition, the dissent reasoned that the majority misapplied the rational basis analysis to hold the act unconstitutional as many other state courts and the U.S. Supreme Court had held comparable state statutes to satisfy the rational basis test. The dissent pointed out forcefully that the exclusion applied to employers and that the choice to be covered or not resided with employers who predominately hired ag employees. As such there was no disparate treatment between ag laborers and other agricultural workers. Rodriguez, et al. v. Brand West Dairy, et al., 378 P.3d 13 (N.M. Sup. Ct. 2016), aff’g., 356 P.3d 546 (N.M. Ct. App. 2015).

• 9.  COE Jurisdictional Determination Subject to Court Review. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On appeal, the court unanimously reversed, strongly criticizing the trial court's opinion. Based on Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (2012), the court held that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct in light of Rapanos v. United States, 547 U.S. 715 (U.S. 2006). The court noted that the COE had deliberately left vague the "definitions used to make jurisdictional determinations" so as to expand its regulatory reach. While the COE claimed that the jurisdictional determination was merely advisory and that the plaintiff had adequate ways to contest the determination, the court determined that such alternatives were cost prohibitive and futile. The court stated that the COE's assertion that the jurisdictional determination (and the trial court's opinion) was merely advisory ignored reality and had a powerful coercive effect. The court held that the Fifth Circuit, which reached the opposition conclusion with respect to a COE Jurisdictional Determination in Belle Co., LLC v. United States Army Corps. of Engineers, 761 F.3d 383 (5th Cir. 2014), cert. den., 83 U.S.L.W. 3291 (U.S. Mar. 23, 2015), misapplied the Supreme Court's decision in Sackett. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, 782 F.3d 984 (8th Cir. 2015), rev'g., 963 F. Supp. 2d 868 (D. Minn. 2013). In a later decision, the court denied a petition to rehear the case en banc and by the panel. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 11697 (8th Cir. Jul. 7, 2015).  In December of 2015, the U.S. Supreme Court agreed to hear the case and affirmed the Eighth Circuit on May 31, 2016. The Court, in a unanimous opinion, noted that the memorandum of agreement between the EPA and the Corps established that jurisdictional determinations are “final actions” that represent the Government’s position, are binding on the Government in any subsequent Federal action or litigation involving the position taken in the jurisdictional determination. When the landowners received an “approved determination” that meant that the Government had determined that jurisdictional waters were present on the property due to a “nexus” with the Red River of the North, located 120 miles away. As such, the landowners had the right to appeal in Court after exhausting administrative remedies and the Government’s position take in the jurisdictional determination was judicially reviewable. Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, 136 S. Ct. 1807 (2016).  
• 8.  Proposed Regulations Under I.R.C. §2704. In early August, the IRS issued new I.R.C. §2704 regulations that could seriously impact the ability to generate minority interest discounts for the transfer of family-owned entities. Prop. Reg. – 163113-02 (Aug. 2, 2016). The proposed regulations, if adopted in their present form, will impose significant restrictions on the availability of valuation discounts for gift and estate tax purposes in a family-controlled environment. Prop. Treas. Regs. §§25.2704-1; 25.2704-4; REG- 163113-02 (Aug. 2, 2016). They also redefine via regulation and thereby overturn decades of court decisions honoring the well-established willing-buyer/willing-seller approach to determining fair market value (FMV) of entity interests at death or via gift of closely-held entities, including farms and ranches. The proposed regulations would have a significant impact on estate, business and succession planning in the agricultural context for many agricultural producers across the country and will make it more difficult for family farm and ranch businesses to survive when a family business partner dies. Specifically, the proposed regulations treat transfer within three years of death as death-bed transfers, create new “disregarded restrictions” and move entirely away from examining only those restrictions that are more restrictive than state law. As such, the proposed regulations appear to exceed the authority granted to the Treasury by Congress to promulgate regulations under I.R.C. §2704 and should be withdrawn. A hearing on the regulations was held in early December.  

• 7.  Capitalization Required For Interest and Real Property Taxes Associated with Crops Having More Than Two-Year Preproductive Period. The petitioner (three partnerships) bought land that they planned to use for growing almonds. They financed the purchase by borrowing money and paying interest on the debt. They then began planting almond trees. They deducted the interest and property taxes on their returns. The IRS objected to the deduction on the basis that the interest and taxes were indirect costs of the “production of real property” (i.e., the almonds trees that were growing on the land. The Tax Court agreed with the IRS noting that I.R.C. §263A requires the capitalization of certain costs and that those costs include the interest paid to buy the land and the property taxes paid on the land attributable to growing crops and plants where the preproductive period of the crop or plant exceeds two years. I.R.C. §263A(f)(1) states that “interest is capitalized where (1) the interest is paid during the production period and (2) the interest is allocable to real property that the taxpayer produced and that has a long useful life, an estimated production period exceeding two years, or an estimated production period exceeding one year and a cost exceeding $1 million.” The corresponding regulation, the court noted, requires that the interest be capitalized under the avoided cost method. The court also noted that the definition of “real property produced by the taxpayer for the taxpayer’s use in a trade or business or in an activity conducted for profit” included “land” and “unsevered natural products of the land” and that “unsevered natural products of the land” general includes growing crops and plants where the preproductive period of the crop or plant exceeds two years. Because almond trees have a preproductive period exceeding two years in accordance with IRS Notice 2000-45, and because the land was “necessarily intertwined” with the growing of the almond trees, the interest and tax cost of the land is a necessary and indispensable part of the growing of the almond trees and must be capitalized. Wasco Real Properties I, LLC, et al. v. Comr., T.C. Memo. 2016-224.

6.         No Recapture of Prepaid Expenses Deducted in Prior Year When Surviving Spouse Claims Same Deduction in Later Year. The decedent, a materially participating Nebraska farmer, bought farm inputs in 2010 and deducted their cost on his 2010 Schedule F. He died in the spring of 2011 before using the inputs to put the spring 2011 crop in the ground. Upon his death, the inputs were included in the decedent’s estate at their purchase price value and then passed to a testamentary trust for the benefit of his wife. The surviving spouse took over the farming operation, and in the spring of 2011, took a distribution of the inputs from the trust to plant the 2011 crops. For 2011, two Schedule Fs were filed. A Schedule F was filed for the decedent to report the crop sales deferred to 2011, and a Schedule F was filed for the wife to report the crops sold by her in 2011 and claim the expenses of producing the crop which included the amount of the inputs (at their date-of-death value which equaled their purchase price) that had been previously deducted as prepaid inputs by the husband on the couple’s joint 2010 return. The IRS denied the deduction on the basis that the farming expense deduction by the surviving spouse was inconsistent with the deduction for prepaid inputs taken in the prior year by the decedent and, as a result, the “tax benefit rule” applied. The court disagreed, noting that the basis step-up rule of I.R.C. §1014 allowed the deduction by the surviving spouse which was not inconsistent with the deduction for the same inputs in her deceased husband’s separate farming business. The court also noted that inherited property is not recognized as income by the recipient, which meant that another requisite for application of the tax benefit rule did not apply. Estate of Backemeyer v. Comr., 147 T.C. No. 17 (2016).

Conclusion

Those were developments ten through six, at least as I see it for 2016.  On Friday, we will list the five biggest developments for 2016.

The Most Important Agricultural Law and Tax Developments of 2016

Overview

This week we will be taking a look at what I view as the most significant developments in agricultural law and agricultural taxation during 2016.  There were many important happenings in the courts, the IRS and with administrative agencies that have an impact on farm and ranch operations, rural landowners and agribusinesses.  What I am writing about this week are those developments that will have the biggest impact nationally.  Certainly, there were significant state developments, but they typically will not have the national impact of those that result from federal courts, the IRS and federal agencies. 

It’s tough to get it down to the ten biggest developments of the year, and I do spend considerable time going sorting through the cases and rulings get to the final cut.  Today we take a quick look at those developments that I felt were close to the top ten, but didn’t quite make the list.  Later this week we will look at those that I feel were worthy of the top ten.  Again, the measuring stick is the impact that the development has on the ag sector as a whole. 

Almost, But Not Quite

Those developments that were the last ones on the chopping block before the final “top ten” are always the most difficult to determine.  But, as I see it, here they are (in no particular order):

• HRA Relief for Small Businesses. Late in 2016, the President signed into law H.R. 6, the 21st Century Cures Act.  Section 18001 of the legislation repeals the restrictions included in Obamacare that hindered the ability of small businesses (including farming operations) to use health reimbursement arrangements (HRAs).  The provision allows   a "small employer" (defined as one with less than 50 full-time employees who does not offer a group health plan to any employees) to offer a health reimbursement arrangement (HRA) that the employer funds to reimburse employees for qualified medical expenses, including health insurance premiums. If various technical rules are satisfied, the basic effect of the provision is that, effective for plan years beginning after December 31, 2016, such HRAs will no longer be a violation of Obamacare's market "reforms" that would subject the employer to a penalty of $100/day per affected person). It appears that the relief also applies to any plan year beginning before 2017, but that is less clear.  Of course, all of this becomes moot if Obamacare is repealed in its entirety in 2017. 

• More Obamacare litigation.  In a somewhat related development, in May the U.S. District Court for the District of Columbia ruled in United States House of Representatives v. Burwell, No. 14-1967 (RMC), 2016 U.S. Dist. LEXIS 62646 (D. D.C. May, 12, 2016), that the Obama Administration did not have the power under the Constitution to spend taxpayer dollars on "cost sharing reduction payments" to insurers without a congressional appropriation.  The Obama Administration had argued that congressional approval was unnecessary because the funds were guaranteed by the same section of Obamacare that provides for the premium assistance tax credit that is designed to help offset the higher cost of health insurance as a result of the law.  However, the court rejected that argument and enjoined the use of unappropriated funds due insurers under the law.  The court ruled that the section at issue only appropriated funds for tax credits and that the insurer payments required a separate congressional appropriation.   The court stayed its opinion pending appeal.  A decision on appeal is expected in early 2017, but would, of course, be mooted by a repeal of Obamacare.

• Veterinary Feed Directive Rule. The Food and Drug Administration revised existing regulations involving the animal use of antibiotics that are also provided to humans.  The new rules arose out of a belief of bacterial resistance in humans to antibiotics even though there is no scientific proof that antibiotic resistant bacterial infections in humans are related to antibiotic use in livestock. As a result, at the beginning of 2017, veterinarians will be required to provide a “directive” to livestock owners seeking to use or obtain animal feed products containing medically important antimicrobials as additives. A “directive” is the functional equivalent of receiving a veterinarian’s prescription to use antibiotics that are injected in animals.  21 C.F.R. Part 558.

• Final Drone Rules.  The Federal Aviation Administration (FAA) issued a Final Rule on UASs (“drones”) on June 21, 2016. The Final Rule largely follows the Notice of Proposed Rulemaking issued in early 2015 (80 Fed. Reg. 9544 (Feb. 23, 2015)) and allows for greater commercial operation of drones in the National Airspace System. At its core, the Final Rule allows for increased routine commercial operation of drones which prior regulations required commercial users of drones to make application to the FAA for permission to use drones - applications the FAA would review on a case-by-case basis. The Final Rule (FAA-2015-0150 at 10 (2016)) adds Part 107 to Title 14 of the Code of Federal Regulations and applies to unmanned “aircraft” that weigh less than 55 pounds (that are not model aircraft and weigh more than 0.5 pounds). The Final Rule became effective on August 29, 2016.

• County Bans on GMO Crops Struck Down.  A federal appellate court struck down county ordinances in Hawaii that banned the cultivation and testing of genetically modified (engineered) organisms.  The court decisions note that either the state (HI) had regulated the matter sufficiently to remove the ability of counties to enact their own rules, or that federal law preempted the county rules. Shaka Movement v. County of Maui, 842 F.3d 688 (9th Cir. 2016) and Syngenta Seeds, Inc. v. County of Kauai, No. 14-16833, 2016 U.S. App. LEXIS 20689 (9th Cir. Nov. 18, 2016).

• Insecticide-Coated Seeds Exempt from EPA Regulation Under FIFRA.  A federal court held that an existing exemption for registered pesticides applied to exempt insecticide-coated seeds from separate regulation under the Federal Insecticide, Rodenticide Act which would require their separate registration before usage.  Anderson v. McCarthy, No. C16-00068, WHA, 2016 U.S. Dist. LEXIS 162124 (N.D. Cal. Nov. 21, 2016).

• Appellate Court to Decide Fate of EPA’s “Waters of the United States” Final Rule.  The U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear a challenge to the EPA’s final rule involving the scope and effect of the rule defining what waters the federal government can regulate under the Clean Water Act.  Murray Energy Corp. v. United States Department of Defense, 817 F.3d 261 (6th Cir. 2016).

• California Proposition Involving Egg Production Safe From Challenge.  California enacted legislation making it a crime to sell shelled eggs in the state (regardless of where they were produced) that came from a laying hen that was confined in a cage not allowing the hen to “lie down, stand up, fully extend its limbs, and turn around freely.”  The law was challenged by other states as an unconstitutional violation of the Commerce Clause by “conditioning the flow of goods across its state lines on the method of their production” and as being preempted by the Federal Egg Products Inspection Act.  The trial court determined that the plaintiffs lacked standing and the appellate court affirmed.  Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016).

• NRCS Properly Determined Wetland Status of Farmland.  The Natural Resource Conservation Service (NRCS) determined that a 0.8-acre area of a farm field was a prairie pothole that was a wetland that could not be farmed without the plaintiffs losing farm program eligibility.  The NRCS made its determination based on “color tone” differences in photographs, wetland signatures and a comparison site that was 40 miles away.  The court upheld the NRCS determination as satisfying regulatory criteria for identifying a wetland and was not arbitrary, capricious or contrary to the law.  Certiorari has been filed with the U.S. Supreme Court asking the court to clear up a conflict between the circuit courts of appeal on the level of deference to be given federal government agency interpretive manuals.  Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016).

• Family Limited Partnerships (FLPs) and the “Business Purpose” Requirement. In 2016, there were two cases involving FLPs and the retained interest section of the Code.  That follows one case late in 2015 which was the first one in over two years.  In Estate of Holliday v. Comr., T.C. Memo. 2016-51, the court held that the transfers of marketable securities to an FLP two years before the transferor’s death was not a bona fide sale, with the result that the decedent (transferor) was held to have retained an interest under I.R.C. §2036(a) and the FLP interest was included in the estate at no discount.  Transferring marketable securities to an FLP always seems to trigger issues with the IRS.  In Estate of Beyer v. Comr., T.C. Memo. 2016-183, the court upheld the assessment of gift and estate tax (and gift tax penalties) with respect to transfers to an FLP because the court determined that every benefit allegedly springing from the FLP could have been accomplished by trusts and other arrangements.  There needs to be a separate non-tax business purpose to the FLP structure.  A deeper dive into the court opinions also points out that the application of the “business purpose” requirement with respect to I.R.C. §2036 is very subjective.  It’s important to treat the FLP as a business entity, not put personal assets in the FLP, or at least pay rent for their use, and follow all formalities of state law. 

Conclusion

These are the developments that were important, but just not big enough in terms of their overall impact on the ag sector to make the list of the “top ten.”  The next post will take a look at developments ten through six. 

Prison Sentences Upheld For Egg Company Executives Even Though Government Conceded They Had No Knowledge of Salmonella Contamination.

Facts

The defendant was an executive (in the capacity of a trustee of the trust that owned the company) of a large-scale egg production company in Iowa, and his son was the Chief Operating Officer of the company. They both pled guilty as “responsible corporate officers” to misdemeanor violations of 21 U.S.C. §331(a) (Food, Drug and Cosmetic Act (FDCA)) for unknowingly introducing eggs that had been adulterated with salmonella into interstate commerce from the beginning of 2010 until approximately August of 2010. They each were fined $100,000 and sentenced to three months in prison. They appealed their sentences as unconstitutional on the basis that they had no knowledge that the eggs at issue were contaminated at the time they were shipped. They also claimed that their sentences violated Due Process and the Eighth Amendment insomuch as the sentences were not proportional to their “crimes.” They also claimed that incarceration for a misdemeanor offense would violate substantive due process.

Trial Court Decision

The trial court determined that the poultry facilities were in poor condition, had not been appropriately cleaned, had the presence of rats and other rodents and frogs and, as a result, the defendant and his son either “knew or should have known” that additional salmonella testing was needed and that remedial and preventative measures were necessary to reduce the presence of salmonella.

Appellate Court Affirms, But Not Unanimously

A split panel of the appellate court agreed, finding that the evidence showed that the defendant and son were liable for negligently failing to prevent the salmonella outbreak and that FDCA provision at issue did not have a knowledge requirement. The majority of the appellate court panel also did not find a due process violation. The defendant and son claimed that because they did not personally commit wrongful acts, due process is violated when prison terms are imposed for vicarious liability felonies where the sentence of imprisonment is only for misdemeanors. However, the court held that vicarious liability was not involved, and that the FDCA provision holds a corporate officer accountable for failure to prevent or remedy “the conditions which gave rise to the charges against him.” Thus, the majority on the appellate court panel determined, the defendant and son were liable for negligently failing to prevent the salmonella outbreak. The court determined that the lack of criminal intent does not violate the Due Process Clause for a “public welfare offense” where the penalty is relatively small (the court believed it was), the defendant’s reputation was not “gravely” damaged (the majority believed that it was not) and congressional intent supported the penalty (the court believed it did). The court also determined that there was no Eighth Amendment violation because “helpless” consumers of eggs were involved. The court also found no procedural or substantive due process violation with respect to the sentences because the court believed that the facts showed that the defendant and son “had reason to suspect contamination” and should have taken action to address the problem at that time (even though law didn’t require it).

One judge wrote a stinging dissent.  This judge pointed out that the government stipulated at trial that its investigation did not identify any corporate personnel (including the defendant and son) who had any knowledge that eggs sold during the relevant timeframe were contaminated with salmonella. The dissent also noted that the government conceded that there was no legal requirement for the defendant or corporation to comply with stricter regulations during the timeframe in issue. As such, the convictions imposed and related sentences were based on wholly nonculpable conduct and there was no legal precedent supporting imprisonment in such a situation. The dissent noted that the corporation “immediately, and at great expense, voluntarily recalled hundreds of millions of shell eggs produced” at its facilities when first alerted to the problem. As such, according to the dissent, due process was violated and the sentences were unconstitutional. 

Implications

Historically, the key case involving this area of the law was decided by the U.S. Supreme Court in 1975.  In that case, United States v. Park, 421, U.S. 658 (1975), the Court allowed the Food and Drug Administration (FDA) to pierce the corporate veil to hold the chief executive officer of the food company strictly liable for unsanitary conditions at the company warehouse on the basis that the FDCA is a “public welfare” statute.  The Court’s decision freed-up federal prosecutors to go after jail sentences for the executives of food companies that have FDCA violations just by virtue of having an executive title.  Historically, however, federal prosecutors reserved the heavy hammer for only those executives who had notice of problems at their facility or facilities.  Under the current Administration, the prosecutorial position has changed to go after executives of food companies that were merely negligent or just on the basis of the strict liability nature of the FDCA.  For instance, in a recent case involving a peanut company executive that knew about the shipping of salmonella-contaminated peanuts, federal prosecutors sought a life sentence, but got 20 years for the executive. 

In the Iowa case, even though the FDCA provision is a strict liability provision, two of the judges thought that culpable intent should have to be proven in some fashion, and they believed the plaintiffs were negligent.  That could mean that there’s a good shot that the plaintiffs might ask the Supreme Court to take another look.  We’ll have to see.

The case is United States v. Decoster, No. 15-1890, 2016 U.S. App. LEXIS 12423 (8th Cir. Jul. 6, 2016).