Agricultural Law and Taxation Blog

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

Overview

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

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

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

Valuation 

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

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

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

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

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

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

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

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

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

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

Funding Approaches

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

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

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

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

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

Other Approaches

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

Potential Problem of Life-Insurance Funding

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

More on Gift Giving

Overview

Earlier this month I wrote about one aspect of the tax rules surrounding making gifts.  In that discussion I pointed out one way in which the IRS determines that a gift has been made – out of a “detached and disinterested generosity.”  In other words, there is no quid pro quo.  There’s nothing expected in return.  But there are even more rules surrounding gifting.  Today, I take a look at some of those additional rules in the context of how they came up in some recent cases and IRS rulings.

More on gift giving – it’s the topic of today’s post.

Disclosure and Statute of Limitations

A federal gift tax return (Form 709) must be filed when gifts to one person in a year total more than $17,000 this year.  That amount goes to $18,000 for gifts made in 2024.  That threshold is known as the “present interest annual exclusion”  and it covers outright gifts up to that ceiling.  Any excess amount gifted to a person in a calendar year then use up the donor’s unified credit that is available to offset taxable gifts during life or federal estate tax at death.  So, while gifts over the threshold may not be taxable because of the credit, they still must be reported on Form 709.  That’s an important point because filing Form 709 will toll the statute of limitations.  Otherwise, the statute is never tolled, and the IRS can come back years later and assert that gift tax (and penalties) is due.   

In Schlapfer v. Comr., T.C. Memo. 2023-65, the petitioner owned a life insurance policy that was issued in 2006.  It was funded by his solely owned corporation.  He assigned ownership of the policy to his mother, aunt and uncle in 2007.  In 2012, he got involved with the IRS Offshore Voluntary Disclosure Program (OVDP) because IRS thought he had undisclosed offshore assets that he hadn’t disclosed that triggered a tax reporting obligation.  As part of the disclosure packet that he submitted to the IRS in 2013, he included a 2006 Form 709 with an attached protective election describing a gift of just over $6 million of corporate stock but asserting that it wasn’t taxable because it was a gift of intangible personal property from a non-domiciled foreign citizen.  In 2016, he signed Form 872 for his 2006 Form 709, agreeing to extend the time to assess tax until November 30, 2017. 

Note:  The present interest annual exclusion was only $1 million for years 2006 and 2007.

In August of 2016, the IRS issued the petitioner a report for his gift tax return.  The IRS concluded in the report that there was no taxable gift in 2006, but that he had made a taxable gift of the insurance policy in 2007 (the year in which he relinquished dominion and control) for which he didn’t file a gift tax return and now owed over $4.5 million of gift tax, plus penalties of approximately $4.3 million.  The IRS didn’t buy his claim that he was a non-domiciled foreign citizen, noting that he had lived in the U.S. since 1979, possessed a green card, and actually became a citizen in 2008.  The IRS claimed that the 2007 wasn’t adequately disclosed and that the statute of limitations on assessment never began to run.  

The petitioner withdrew from the OVDP, and the IRS prepared a substitute gift tax return for 2007, followed with the provision in late 2019 of a statutory notice of deficiency formally asserting the $4.4 million in gift tax deficiency and $4.3 million in penalties.  In turn, he filed a Tax Court petition claiming that the three-year statute of limitations (running from the time the gift tax return is filed) to assess gift tax had expired because he had filed a gift tax return with a protective election.

The Tax Court agreed with the petitioner, noting that it was immaterial when the gifts were completed.  This was because the Tax Court determined that he had made adequate disclosure of incomplete gifts upon the filing of his 2006 return.  That was enough, the Tax Court reasoned, to trigger the three-year period of limitations (see Treas. Reg. § 301.6501(c)-1(f)(5)) because he had adequately disclosed the gifts on his 2006 gift tax return by providing the IRS with enough information by virtue of the return and accompanying documents.  Taken in total it was enough to satisfy the adequate disclosure requirement, resulting in substantial compliance.  This was true even though the petitioner had not strictly satisfied the requirements of Treas. Reg. § 301.6501(c)-1(f)(2).  Thus, the period of limitations to assess the gift tax had expired before the deficiency notice was issued.

Charitable Giving - Substantiation

If you are claiming a deduction for a charitable gift, you must substantiate the gift.  In Albrecht v. Commissioner, T.C. Memo. 2022-53, the petitioner donated approximately 120 pieces of jewelry to a museum in 2014.  The museum was a qualified charity.  The museum executed a “Deed of Gift” which specified, in part, that “all rights, titles, and interests” in the jewelry were transferred from the donor to the donee upon donation unless otherwise stated in the Gift Agreement.  The petitioner claimed a charitable deduction for the donation on her 2014 return and supported the claimed deduction by submitting the “Deed of Gift” documentation. 

The IRS denied the deduction on the basis that the “Deed of Gift” documentation did not meet the substantiation requirements of I.R.C. §170(f)(8)(B) that require a description of the donated item(s); whether the donee provided any form of consideration in exchange for the donation; and a good faith estimate of the value of the donation. The IRS pointed out that the “Deed of Gift” documentation from the museum did not state whether the museum provided any goods or services in return for the donation. In addition, the terms of the “Deed of Gift” documentation with the museum referred to a superseding agreement, “the Gift Agreement,” which left open the question of whether the donor retained some title or rights to the donation, and also indicated that the petitioner’s documentation did not include the entire agreement with the done. 

The Tax Court agreed with the IRS and held that the petitioner did not comply with the substantiation requirements of I.R.C. §170(f)(8)(B) and denied the charitable deduction. 

Estate Transfers

The decedent in Estate of Spizzirri v. Comr., T.C. Memo. 2023-25, had four children from the first of his four marriages and had three stepchildren as the result of his fourth marriage. Before his fourth marriage, the decedent and his next wife-to-be entered into a prenuptial agreement, which was modified several times during their marriage. Among other provisions, the prenuptial agreement, as modified, provided that the decedent’s will would include payments to the surviving spouse and a bequest of $1 million to each of the stepchildren.

Although the decedent’s fourth marriage was never dissolved, he and his wife were estranged for several years before his death as a result of his various relationships with other women that resulted in two illegitimate children. The decedent made large payments to a number of these women as well as to various other family members, but he never reported them as gifts or issued a Form 1099-MISC to the recipients.  The decedent’s will had been executed before his fourth marriage and did not contain the provisions he agreed to in the prenuptial agreement regarding payments to his surviving spouse and her children. The will generally provided that the decedent’s estate would go to his children from his first marriage. There were three codicils to this will, all of which specified the rights of his two bastard sons and one that provided for the payment of the mortgage on, and transfer of his interest in, a condominium he had purchased with one of his courtesans.

During probate, the decedent’s surviving spouse filed claims seeking enforcement of the prenuptial agreement, which were ultimately settled. The surviving spouse’s children also filed claims seeking to enforce the prenuptial agreement regarding the $1 million bequest to each of them. The estate ultimately paid these bequests and sent the Forms 1099-MISC reporting these payments.  After the claims were settled, the estate filed an estate tax return. Among other reported items, the return reported no adjusted taxable gifts, even though the decedent had made payments to various persons in excess of the gift tax annual exclusion. The return also reported the payments to the surviving spouse’s children as claims against the estate that reduced the decedent’s taxable estate. Additionally, the estate claimed as administrative expenses the cost of repairs to property of the estate.

The IRS issued a notice of deficiency that increased adjusted taxable gifts from zero to nearly $200,000, disallowed the deductions for the payments to the surviving spouse’s children, and disallowed administrative expenses for repairs to one of the estate’s properties.  The Tax Court determined that the estate had failed to meet its burden of proof that the transfers were not gifts. The estate argued that the transfers were payments for care and companionship services during the last years of the decedent’s life. The court noted that the decedent made the transfers by checks that contained no indication that they were meant as compensation. In addition, the decedent failed to issue any Forms 1099 or W-2 related to these payments, nor did he report them on his personal income tax returns. The Tax Court also noted that witness testimony failed to establish that the transfers were anything other than gifts.  The Tax Court also noted that the payments to the surviving spouse’s children would only provide a deduction for the estate if they were bonafide and contracted for “adequate and full consideration in money or money’s worth” and not be predicated solely on the fact that the claim is enforceable under state law. Based on these requirements, the Tax Court determined that the claims were not bonafide but were of a donative character, finding that payments to the surviving spouse’s children did not stem from an agreement for the performance of services — they were essentially bequests not contracted for adequate and full consideration in money or money’s worth.

Regarding the administrative expenses for repairs to the house, the Tax Court noted that Treas. Reg. §20.2053-3(a) limits deductible administrative expenses to those that are actually and necessarily incurred in the administration of the decedent’s estate. The Tax Court noted that the appraisal report for the house, on which the house’s claimed FMV was based, stated that the decks on the house that were repaired “may need to be replaced” and that the estate did not provide any corroboration that their replacement was necessary for a sale or to maintain the FMV claimed on its return. Thus, the court determined that the costs paid for the repairs were not deductible expenditures necessary for the house’s preservation and care but rather were nondeductible expenditures for improvements to it.

Conclusion

The rules on gifting can be complex.  If you are thinking about making substantial gifts and/or doing so in a complicated fashion, make sure to get good professional advice beforehand.

Ethics and 2024 Summer Seminars!

Tax Ethics

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

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

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

Summer Seminars

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

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

Feeling Detached and Disinterested? – Then Gift Giving Is for You!

Overview

Soon the Christmas season will be upon us.  With that comes the joy of gift giving.  But not according to the IRS.  If you gift assets, either as part of an estate plan or for purposes of setting up another person in business or for other reasons, you must be “detached and disinterested.”  That sounds as if it saps the joy right out of gift giving.  Thanks, IRS! 

But, what does “detached and disinterested” mean?  When is a transfer of funds really a gift?  Why does it matter?  It matters because the recipient of a gift doesn’t have to report the value of the gifted amount into income.  If the amount transferred is not really a gift, then it’s income to the recipient and the value of the gifted property is still in the estate of the person making the gift.  When large amounts are involved, the distinction is of utmost importance.

When is a transfer of funds a gift?  It’s the topic of today’s post.

Definition of a “Gift”

Under the Internal Revenue Code (“Code”), gross income is income from whatever source derived unless otherwise excluded.  I.R.C. §61(a).  However, gross income does not include the value of property that is acquired by gift.  I.R.C. §102(a).  In Comr. v. Duberstein, 363 U.S. 278 (1960), the U.S. Supreme Court defined a gift under I.R.C. §102 as a transfer that proceeds from a “detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.”  As a result, the Supreme Court concluded that the most important consideration in determining whether a gift has been made is the donor’s intent.  That’s a broader inquiry than simply looking at how the donor characterizes a particular transaction.  A court will examine objectively whether a gift occurs based on the facts and if those facts support a donor that intended a transfer based on affection, etc.  Detached and disinterested generosity is the key.  If the transfer was made out of a moral duty or some sort of expectation on the recipient’s part, it is not a gift under I.R.C. §102 because it did not arise out of a detached and disinterred generosity.  Similarly, when the recipient has rendered services to a donor, a payment for services is not a gift even if the transferor had no legal obligation to pay the remuneration for the services.   

Apart from the Court’s analysis in Duberstein, a particular transaction may amount to a “common law” gift.  A common law gift requires only a voluntary transfer without consideration.  If the donor had no legal obligation to make the payment, the transfer is a gift under the common law standard.  That’s an easier standard to satisfy than the Code definition set forth in Duberstein. 

Example – Tax Court Decision

In Kroner v. Comr., T.C. Memo. 2020-73 illustrates how the courts examine whether a particular transfer constitutes a gift and the consequences of misreporting the transaction(s) for tax purposes.  The petitioner was the CEO of a business that bought and sold structured settlement payments and lottery winnings.  The company would buy structured payments from lottery winners and resell the payments to investors.  The petitioner had historically worked in the discounted cashflow industry and, as a result, met a Mr. Haring, a wealthy British citizen, sometime in the 1990s.  Their business relationship lasted until 2007.

In 2003 and 2004, the petitioner was interested in protecting his assets and an attorney recommended the use of an “offshore” trust to hold the petitioner’s assets.  An offshore trust is often associated with tax scams, but I reserve that discussion for another post in the future.  In any event, the petitioner established the “Kroner Family Trust” in a small island in the Caribbean.  The petitioner was the beneficiary of the trust along with his son.  In 2007, the petitioner established another trust in the Bahamas to hold business assets.  From 2005-2007, the petitioner received wire transfers from Mr. Haring totaling $24,775,000.  Some of the transferred funds went directly to the petitioner, but others went to the trust in the Caribbean Island and still others went to the petitioner’s business.  The lawyer that set up the offshore trusts “advised” the petitioner that the transfers were gifts that the petitioner didn’t have to report as taxable income.  The attorney’s legal “analysis” which led him to this conclusion was a conversation he had with the petitioner and a note that he drafted for Mr. Haring stating that the transfers were gifts.  The attorney also advised the petitioner of the requirements to file Form 3520 every year that he received a transfer from Mr. Haring to report the gifts from a foreign person.  A CPA prepared the Form 3520 for the necessary years.  The petitioner never reported any of the transfers from Mr. Haring as taxable income. 

The petitioner was audited for tax years 2005-2007.  The IRS took the position that the transfers were not gifts, should have been reported as taxable income, and assessed accuracy-related penalties on top of the tax deficiency. 

The Tax Court agreed that the transfers should have been included in the petitioner’s taxable income.  They were not gifts.  The Tax Court noted that Mr. Haring’s intention was the most critical factor in determining the status of the transfers.  The petitioner bore the burden to establish Mr. Haring’s intent by a preponderance of the evidence.  However, Mr. Haring never appeared at trial and didn’t provide testimony.  Instead, the petitioner tried to establish the gift nature of the transfers by his own testimony.  The petitioner and Mr. Haring had operated some business interests together in the 1990s, and the petitioner acted as a nominee for Mr. Haring for certain of Mr. Haring financial interests.  He even formed a trust in Liechtenstein for Mr. Haring in 2000.  Mr. Haring also provided a loan for the petitioner’s credit counseling business in 2000.  That loan was paid off in 2007.  Mr. Haring also held about a 70 percent equity interest in the petitioner’s cashflow industry business in exchange for providing funding and loan guarantees.  He later liquidated his interest for $255 million. 

The petitioner last saw Mr. Haring in 2002 and testified at trial that he didn’t know where he lived and that he didn’t know his telephone number.  He did, however, receive a telephone call from Mr. Haring in 2005 that lasted no more than three minutes.  The petitioner claimed that Mr. Haring told him during the call that Mr. Haring had a “surprise” for the petitioner.  The petitioner later met with Mr. Haring’s associate and they set up the ability to receive wire transfers from Mr. Haring into the petitioner’s bank account.  That’s when the attorney drafted a note to the petitioner from Mr. Haring stating that the transfers would be gifts. 

The Tax Court didn’t buy the petitioner’s story, finding that neither the petitioner nor the attorney were credible witnesses.  The Tax Court stated that the petitioner’s testimony was self-serving and that the attorney’s testimony was “simply not credible.”  There was no supporting documentary evidence.  In addition, the attorney represented both Mr. Haring and the petitioner.  The Tax Court also noted that the attorney was “evasive in his answers and in his selective invocation of the attorney-client privilege with regard to the legal advice provided to Mr. Haring about the transfers.”  The Tax Court also doubted the authenticity and credibility of the 2005 note allegedly from Mr. Haring but drafted by the attorney regarding his desire to gift funds to the petitioner.  Thus, the note carried little weight in determining whether the transfers were gifts.     

The Tax Court also determined that the petitioner failed to prove that the transfers were made with disinterested generosity.  The record was simply devoid of any credible evidence to prove that Mr. Haring transferred the funds to the petitioner with detached and disinterested generosity.  The Tax Court noted that timing of some of the transfers with liquidity events of the petitioner’s business of which Mr. Haring was an investor.  That raised a question as to whether Mr. Haring was acting as the petitioner’s nominee. 

The Tax Court determined that the petitioner need not pay the 20 percent accuracy-related penalty because the IRS failed to satisfy its burden of production under I.R.C. §6751(b). 

Conclusion

The Kroner case is a textbook lesson on what constitutes a gift – detached and disinterested generosity.  The burden of establishing that a transfer is a nontaxable gift is on the party asserting that the transfer amounted to a gift.  The case is also a lesson into the messes that sloppiness and questionable lawyering can get a client into.  When the amount of the gift (or gifts) is as large as that involved in the Kroner case, attention to detail is a must.  The income tax consequences from being wrong are enormous. 

For gifts you make this Christmas season, remember that the resulting tax consequences to you are likely to be better if you remain “detached and disinterested.”

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

Overview

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

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

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

Advantages and Disadvantages

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

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

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

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

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

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

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

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

 

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

Sale of Split-Interest Property

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

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

Corporate Basis

                                                                                   Land               Tiling               Total

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

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

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

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

Dave Jr.’s Basis:

            At Purchase                                                     $25,000

            Statutory Increase for Amortization          $33,600

            Total Adjusted Tax Basis                               $58,600

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

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

Split-Interest Purchases with Unrelated Parties

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

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

Estate Tax Implications

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

Conclusion

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

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

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

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

In General

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

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

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

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

Split-Interest Transactions

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

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

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

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

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

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

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

A couple of points can be made about this conclusion:

• The ruling is correct with respect to the land. That’s because I.R.C. §167(e)(1) contains a general rule denying any depreciation or amortization to a taxpayer for any term interest during the period in which the remainder interest is held, directly or indirectly, by a related person.

• However, the ruling is incorrect with respect to the conclusion that no depreciation would be available for the buildings on the land. R.C. §167(e)(4)(B) states that if depreciation or amortization would be allowable to the term interest holder other than because of the related party prohibition, the principles of I.R.C. §167(d) apply to the term interest.  Under I.R.C. §167(d), a term holder is treated as the absolute owner of the property for purposes of depreciation.  Thus, this exception would allow the term holder to claim depreciation with respect to the buildings but not the land, in the case of a related party term certain-remainder acquisition.

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

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

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

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

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

Conclusion

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

Ag Law and Tax Topics – Miscellaneous Topics

I haven’t been able to write for the blog recently given my heavy travel and speaking schedule, and other duties that I have.  But that doesn’t mean that all has been quiet on the ag law and tax front.  It hasn’t.  Today I write about several items that I have been addressing recently as I criss-cross the country talking ag law and tax.

What if TCJA Isn’t Extended?

Tax legislation that went into effect in 2018 is set to expire at the end of 2025.  For many, this could have a significant impact starting in 2026. Do you have a plan in place if the tax law changes dramatically at that time? 

If Congress allows the 2017 tax law to expire, how might it impact you?  For starters, tax rates will increase, and those currently in the 12 percent federal bracket will see a 25 percent increase in their tax rate.  Currently, the 12 percent bracket for married persons filing joints applies to taxable incomes from $22,000-$89,450.  So, for instance, a married couple with $75,000 of taxable income would see their tax bill raise from $8,560 to approximately $10,350. 

In addition, the standard deduction will be reduced (essentially cut in one-half), but personal exemptions will be restored.  Also, the child tax credit will be reduced from $2,000 per qualifying child to $1,000, refundability will be reduced and the credit will be eliminated entirely for some families.  For homeowners, the current limit on the mortgage interest deduction will be removed.

The 2017 law removed the penalty for not getting government health insurance, but that will be restored starting in 2026, as will the deduction for state and local taxes.  In addition, the lower limit on charitable deductions will be reinstated.  For businesses that aren’t corporations, the 20 percent deduction on business income will go away.   

The estate tax exemption will be essentially cut in half, (from about $14 million in 2025 to about $7 million in 2026).  For larger estates, making gifts now might make some sense. 

It might be time to start thinking about the changes that could occur starting in 2026 and putting a good plan in place to handle what could happen.  If you operate a business, think of higher taxes as an additional cost that needs to be managed.

Buying Farmland with a Growing Crop

Buying farmland with a growing crop presents unique tax issues.  It has to do with allocating the purchase price and the timing of deductions. 

When you buy farmland with a growing crop on it the tax Code requires that you allocate the purchase price between crops and land based on their relative fair market values.  You can’t deduct the cost of the portion of the land purchase allocated to the growing crop.  While the IRS has not been clear on the issue, the costs should be capitalized into the crop and deducted when the income from the crop is reported or fed to livestock, which may be in a year other than the year in which the crop is sold.

If you buy summer fallow ground, you can’t deduct or separately capitalize for later deduction the value of costs incurred before the purchase.  Additional costs incurred before harvest such as for hauling are deductible if you’re on the cash method.

One approach to consider that could lead to a better tax result might be to lease the land before the purchase.  That way you incur the planting costs and can deduct them rather than the landlord that will sell the farmland to you. 

If your considering buying farmland with a growing crop talk with your farm tax advisor so you get the best tax result possible for your particular situation.

What is Livestock?

The definition of “livestock” can come up in various settings.  For example, sometimes the tax Code says that bees are livestock for one purpose but are not for other purposes.  The issue of what is livestock can also arise in ag lending situations, ag contracts as well as zoning law and ordinances. 

What is “livestock”? The definition of “livestock” for purposes of determining whether an asset is used in a farming business includes “cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals and other mammals.”  It does not include “poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, and reptiles.” While that definition normally does not include bees and other insects as livestock, the IRS has ruled that honeybees destroyed due to nearby pesticide use qualify for involuntary conversion treatment. 

When pledging livestock as collateral for an ag loan, it should be clear whether unborn young count as “livestock” subject to the security agreement.  From a contract standpoint, semen is not livestock unless defined as such. 

For zoning laws and ordinances, clarity is the key.  Is a potbellied pig “livestock” or a pet”?  Will an ordinance that bans livestock prohibit the keeping of bees in hives?  It probably won’t unless it specifically defines bees as “livestock.” 

Partition of Farmland

If your estate plan is to simply “let the children figure it out,” it’s likely instead that a judge will.  Indeed, one of those situations where a judge gets involved is when the parents have left farmland in co-equal ownership to multiple children after the last of the parents to die.  That often leads to a partition and sale with the proceeds being split among the children. 

Partition and sale of land is a legal remedy available if the co-owners cannot agree on whether to buy out one or more of them or sell the property and split the proceeds.  It’s often the result of a poorly planned estate where the surviving parent leaves the land equally to all of the children and not all of them want to farm or they simply can’t get along.  Because they each own an undivided interest in the entire property, they each have the right of partition to parcel out their interest.  But that rarely is the result because they aren’t able to establish that the tract can be split exactly equally between them in terms of soil type and slope, productivity, timber, road access, water and the like.  So, a court will order the entire property sold and the sale proceeds split equally.  That result can devastate an estate plan where the intent was to keep the farm in the family for future generations.

A little bit of estate planning can produce a much better result.

Crop Insurance Proposal

For many farmers, crop insurance is a key element of an effective risk management strategy. Private companies sell and service the policies, but taxpayers subsidize the premiums.  That means the public policy of crop insurance is a component of Farm Bill discussions.  There’s a current reform proposal on the table. 

A crop insurance reform proposal has been introduced in the U.S. House.  Its purpose is to help smaller farming operations get additional crop insurance coverage.  But its means for doing so is to eliminate premium subsidies for large farmers without providing additional coverage for smaller producers. 

The bill caps annual premium subsidies at $125,000 per farmer and eliminates them for farmers with more than $250,000 in adjusted gross income.  The bill also reduces the subsidies to crop insurance companies which is projected to reduce their profit from 14 percent to about 9 percent. 

In addition, the bill eliminates subsidies for Harvest Price Option and requires the USDA to disclose who gets subsidies and the amount.  It also restricts crop insurance to active farmers.

The bill represents a dramatic change to the crop insurance program.  There’s not really anything in the bill to help smaller farming operations, and if the bill passes all farmers would see an increase in crop insurance premiums. 

Veterinarian’s Lien

A lien gives the lienholder an enforceable right against certain property that can be used to pay a debt or obligations of the property's owner. Most states have laws that give particular persons a lien by statute in specific circumstances. These statutory liens generally have priority over prior perfected security interests.

The rationale behind statutory liens is that certain parties who have contributed inputs or services to another should have a first claim for payment.  But you have to be able to prove entitlement to the lien.

In a recent case, a veterinarian treated a rancher’s cattle.  The rancher didn’t pay the vet bill and while the bill remained outstanding, the vet came into possession of cattle that the rancher was grazing for another party.  The vet cared for the cattle for over two months and then filed a lien for his services.  Ultimately the cattle were sold at a Sheriff’s sale and the rancher’s lender claimed it had a prior lien on the proceeds.  Normally, the veterinarian’s lien would beat out the lender’s lien, but the court concluded that the veterinarian couldn’t establish who actually delivered the cattle to him or that the rancher requested his services. 

The court said the vet didn’t meet his burden of proof to establish that the lien was valid. While liens have position, their validity still must be established.

Digital Assets and Estate Planning

One often overlooked aspect of estate planning involves cataloguing where the decedent’s important documents are located and who has access to them.  The access issue is particularly important when it comes to the decedent’s digital assets such as accounts involving email, banks, credit cards and social media. 

Who has access to a decedent’s digital assets and information?  Certainly, the estate’s fiduciary should have access, but it’s the type of access that is the key.  The type of access, such as the ability to read the substance of electronic communications, should be clearly specified in the account owner’s will or trust.  If access to digital assets and information is to be granted to a third party before death, the type and extent of access should be set forth in a power of attorney. 

But, even with proper planning, it is likely that a service provider will require that the fiduciary obtain a court order before the release of any digital information or the granting of access. 

Digital assets are a very common piece of a decedent’s estate.  Make sure you have taken the needed steps to allow the proper people to have access post-death.  Doing so can save time and expense during the estate administration process.

There are also tax consequences of exchanging digital assets after death.

Conclusion

These are just a few items of things that have been on my mind recently.  I am sure more will surface soon.

Farmland Values and Thoughts on Transitioning to the Next Generation

Overview

A significant percentage of farm and ranch families desire to keep the family farming or ranching activity in the family for future generations.  Certainly, for some, that option is not possible as there is no heir interested in continuing the farming/ranching activity into the future.  But, for those families interested in maintaining a viable business throughout subsequent generations of the family what considerations should be made concerning how to accomplish that objective?

Obviously, tax issues play a major role in transition planning, but other issues are also present.  Some issues can be addressed with careful planning.  Other issues require the proper family chemistry.  All issues require an openness to discuss and a willingness to work out.

Some random thoughts on land value and transitioning the farm/ranch business – it’s the topic of today’s post.

Land Values

Land is typically the biggest asset in terms of value in a farm or ranch estate.  So, a successful transition of the farming/ranching business must address the transfer of land ownership.  Historically, land values more than doubled from 2000 to 2010, and continued to increase post-2010.  From 2009-2013, the overall increase in agricultural land values was 37 percent.  In the corn belt, from 2006-2013, the average farm real estate value increased by 229.6 percent.  For the next couple of years, farmland values remained steady, but then farmland values dropped from 2016 to 2020 by 1.3 percent, on average.  Farmland values remained high in 2020, averaging $3,160 per acre, a small decrease of 0.8 percent compared with 2019, and rose throughout 2021 and 2022. Now, USDA says that the value of all land and buildings on farms averaged $4,080 per acre for 2023, up $280 per acre (7.4 percent) from 2022. The United States cropland value averaged $5,460 per acre, an increase of $410 per acre (8.1 percent) from the previous year. The United States pasture value averaged $1,760 per acre, an increase of $110 per acre (6.7 percent) from 2022.

Using the USDA numbers, a 640-acre crop farming operation would have land valued at approximately $3.5 million.  Add to that number amounts for machinery and equipment, implements, buildings, livestock and other inventory, a home and other personal assets and investments, the average farming operation is likely worth more than $5 million. 

The current level of the applicable exclusion for federal estate tax purposes is $12.92 million.  If the Congress does nothing with respect to the estate tax, that amount will adjust for inflation in 2024 and 2025.  Then it will revert to $5 million in 2026 with an inflation adjustment that will likely peg it around $7-$7.5 million.  So, the “average” farm doesn’t currently have an estate tax issue, but it land and other asset values continue to rise, many farms and ranches could have such a problem beginning in 2026.  You might recall numerous Democrat proposals to decrease the exclusion amount in recent years to the $3.5 million to $5 million range.  A $3.5 million exemption as applied to a farm with an estate tax value of $5 million would trigger an estate tax bill of approximately $300,000, assuming planning steps were taken to minimize the impact of the tax. 

If the farming operation is located in a state that also imposes tax at death, there would be an additional layer of taxation.  The states in the heartland of crop and livestock production do not impose taxes at death (with exceptions for Illinois and Minnesota), but if the farm is in, for example, Massachusetts, the exemption is only $1,000,000 and the top rate of tax is 16 percent.  So, that $5 million “average” farm could anticipate a tax bill in the “ballpark” of $300,000, again assuming steps have been taken to minimize the impact of the state’s death-related tax. 

This all means that rising land values pose a transition planning issue both with respect to the prospect of estate taxation and the ability of the next generation to gain an ownership interest in the family business. 

Common Objectives of Succession Planning

Based on my experiences working with farm and ranch families over the past 31 years, I have noticed certain common objectives when it comes to transitioning the business to the next generation. These include making sure the next generation starts off in a good financial position and creating a plan for the older generation of owners and managers to retire in the way they want to enjoy their success of years of hard work. Also, for those families that have both on-farm and off-farm heirs, an important goal is to separate the ownership/control interest of the on-farm heir(s) from the income/investment interest of the off-farm heir(s).  Of course, all of this is to be done while simultaneously minimizing the tax impact of property transfers. 

Ways Children Become Involved in the Farming/Ranching Operation

There are numerous ways that the next generation can come into an ownership position of the farming operation.  One way involves the long-term acquisition of farm assets while at the same time supplementing farm income with off-farm income.  Another way is for a child to establish their own small farm business and gradually acquires farm assets by way of renting and ownership.  Unless a health sharing arrangement is entered into, off-farm employment may be necessary (particularly for a non-farming spouse) for participation in an employer-sponsored health insurance plan.

Other approaches to the transition matter may involve a sharing of labor and capital, or the parents loaning machinery to a child so the child can rent or purchase some land in the neighborhood and start a farming business.  It is not unusual to see some equipment purchased jointly with a portion being depreciated on each the parent’s and child’s depreciation schedule. This seems to be a rather common arrangement and often works well. However, a concern is that if an accident should occur, the court may find the two individuals are in a partnership and experiencing joint and several liabilities. 

If the parents are at or are nearing the point at which they’d like to step-back from being the primary operations of the business, the renting and/or purchasing of assets from the parents may occur.  Or, some sort of entity is created with the parents and the child(ren) being owners in certain capacities.  Usually when this is the way a child gets started into the business, two or more business entities are formed. A partnership, corporation, or LLC is formed for the operating business and the real estate and possibly other assets are not placed into the operating business but are instead rented from the parent. Over time the child may also acquire real estate outside the operational business and rent that real estate to the business as well.  

Conclusion

The value of farming operations has, in general, increased in recent years.  This makes the transition planning aspect of estate planning more important for farming and ranching operations that have at least one family heir that will be operating the business into the next generation. But, transition planning is multi-faceted and I have only begun scratch the surface with some basic thoughts on the process.  The “dirt is in the details” and the complexity is tied to the factual situation of each family and their goals and objectives.

Coeur d’ Alene, Idaho, Conference – Twin Track

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

Speakers

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

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

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

The speakers for the ag law track are as follows:

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

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

Who Should Attend

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

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

Sponsorship

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

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

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

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

Sunday Afternoon Random Thoughts on Ag Law and Tax

Overview

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

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

Direct Beef Sales and Custom Agreements

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

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

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

Handling Long-Term Care Costs

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

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

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

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

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

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

Pre-Paid Farm Expenses and Death

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

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

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

Liability for Guests on the Farm

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

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

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

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

Health Savings Accounts

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

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

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

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

Conclusion

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

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

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

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

Miscellaneous Agricultural Law Topics

Proper Tax Reporting of 4-H/FFA Projects

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

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

The Importance of Checking Beneficiary Designations

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

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

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

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

Liability Release Forms – Do They Work?

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

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

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

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

Equity Theft

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

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

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

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

The Climate, The Congress and Farmers

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

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

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

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

Secure Act 2.0 Errors

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

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

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

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

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

Implications of SCOTUS Union Decision on Farming Businesses

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

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

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

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

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

Digital Grain Contracts

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

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

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

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

Bibliography – First Quarter of 2023

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

Bankruptcy

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

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

Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith

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

Business Planning

Summer Seminars

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

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

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

Civil Liabilities

Top Ag Law and Tax Developments of 2022 – Part 1

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

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

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

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

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

Contracts

Top Ag Law and Developments of 2022 – Part 2

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

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

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

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

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

Environmental Law

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

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

Top Ag Law and Developments of 2022 – Part 2

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

Top Ag Law and Developments of 2022 – Part 3

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

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

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

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

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

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

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

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

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

Estate Planning

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

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

Happenings in Agricultural Law and Tax

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

Summer Seminars

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

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

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

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

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

The Marital Deduction, QTIP Trusts and Coordinated Estate Planning

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

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

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

Income Tax

Top Ag Law and Developments of 2022 – Part 3

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

Top Ag Law and Developments of 2022 – Part 4

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

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

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

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

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

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

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

Deducting Residual (Excess) Soil Fertility

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

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

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

Happenings in Agricultural Law and Tax

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

Summer Seminars

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

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

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

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

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

Real Property

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

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

Happenings in Agricultural Law and Tax

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

Adverse Possession and a “Fence of Convenience”

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

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

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

Abandoned Rail Lines – Issues for Abutting Landowners

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

Regulatory Law

Top Ag Law and Developments of 2022 – Part 2

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

Top Ag Law and Developments of 2022 – Part 4

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

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

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

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

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

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

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

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

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

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

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

Foreign Ownership of Agricultural Land

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

Abandoned Rail Lines – Issues for Abutting Landowners

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

Secured Transactions

Priority Among Competing Security Interests

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

Water Law

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

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

Happenings in Agricultural Law and Tax

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

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

Overview

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

August Conferences in Idaho

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

June Michigan Conference

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

Here’s the itinerary for the Michigan conference.

Day 1 Itinerary

7:30-8:00 a.m. – Registration

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

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

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

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

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

9:45–10:05 a.m. – Morning Break

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

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

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

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

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

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

11:45–12:45 p.m. – Luncheon

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

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

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

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

2:25-2:45 p.m. – Afternoon Break

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

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

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

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

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

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

4:25 p.m. - Adjournment

Day 2

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

7:30-8:00 a.m. — Registration

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

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

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

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

9:45-10:05 a.m. — Morning Break

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

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

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

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

11:45-12:45 p.m. — Lunch

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

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

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

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

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

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

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

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

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

4:25 p.m. — Conference Adjourns

Conclusion

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

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

The Marital Deduction, QTIP Trusts and Coordinated Estate Planning

Overview

A married person can leave an unlimited amount of property outright to the surviving spouse at death with no resulting federal estate tax.  I.R.C. §2056.  The is also an unlimited gift tax marital deduction.  I.R.C. §2523. This means that interspousal transfer, either during lifetime or at death, may be made tax-free regardless of amount.  In addition, for lifetime spousal transfer, no gift tax return need be filed. 

But, to qualify for the marital deduction, the transfer to the spouse must be outright.  It cannot be a life estate, or a terminable interest as defined in I.R.C. §2056(b).   That is, unless the terminable interest is a qualified terminable interest property (QTIP) interest.  I.R.C. §2056(b)(7). 

A QTIP trust was at the heart of a multi-year family dispute that the U.S. Tax Court recently decided.  The case points out that QTIP trusts must be utilized carefully to avoid negative tax consequences and family disputes.

QTIP Trusts – The Basics

A QTIP trust is similar to a marital A/B trust set-up. They are both irrevocable “credit shelter” trusts that take effect when the first spouse of a married couple dies. With an A/B trust arrangement, an allocation of the first spouse’s assets at the time of death is done.  In general, for an estate potentially subject to federal estate tax, an amount equal to the estate tax unified credit should be taxed in the first spouse’s estate which would then be offset by the credit.  The balance should pass to the surviving spouse outright and qualify for the marital deduction.  This is the A/B trust arrangement – a credit shelter trust and a marital deduction trust.  The amount in the credit shelter trust is taxed in the first spouse’s estate but offset by the unified credit, and the amount in the marital deduction trust is offset by the marital deduction.  The result is often little to no tax in the first estate and estate tax optimization in the second spouse’s estate.  The difference between a QTIP trust and a marital trust is that with a QTIP trust has the right to income from the trust (and, perhaps, principal) but control does not pass to the surviving spouse.  With a marital trust the surviving spouse controls the asset distribution.

In situations, such as a second marriage, where the first spouse to die wants to ensure the passage of property to someone other than the surviving spouse, the marital deduction would be lost to the first spouse’s estate without the QTIP provision.  But, with a QTIP the first spouse can control disposition of the property upon the surviving spouse’s death while still qualifying the property for the marital deduction in the decedent’s estate. 

QTIP requirements.  An election must be made to achieve QTIP treatment and certain requirements must be satisfied – 1) the property must pass to a spouse from the decedent; 2) the decedent’s spouse must be entitled to all of the income from the property for life, payable at least as frequently as annually; and 3) no one, including the spouse, may have a power to appoint any part of the principal to anyone other than the spouse during the spouse’s life.  If these conditions are satisfied, the estate of the first spouse to die, can claim a marital deduction for the value of the property in the QTIP trust.

Note:  A QTIP trust does not necessarily restrict the surviving spouse’s ability to withdraw principal, but it is common that a QTIP trust does not grant such a withdrawal power

Estate of Kalikow v. Comr., T.C. Memo. 2023-21

Basic facts.  A prominent New York City real estate developer died in 1990 with a will that created a QTIP trust for the benefit of his surviving wife.  The QTIP trust contained ten income-producing apartment buildings in New York City.  The trustees were instructed to pay the trust’s net income at least quarterly to the surviving spouse for life along with discretionary principal distributions, and then the assets were to be divided and paid to trusts for the benefit of the couple’s two adult children. 

In 1997, the couple’s son and the family’s CPA (as trustees of the trust) created a Family Limited Partnership (FLP) and the QTIP trust was transferred to the FLP in exchange for a 98.5 percent partnership interest.  At the time of the surviving spouse’s death in early 2006, the QTIP trust held the FLP interest, $835,000 of cash and marketable securities.  After payment of expenses, the balance of the surviving spouse’s estate passed to charity.  The couple’s daughter was also added as a trustee.  Under the surviving spouse’s will, the trust was responsible for its share of estate tax arising from the inclusion of the trust property in the decedent’s estate.

A grandchild of the couple’s petitioned a local court to compel the trustees to render an account of income distributions from the QTIP trust to the surviving spouse.  The trustees filed competing reports and the CPA-trustee claimed that the FLP had failed to distribute to the trust its full share of FLP distributable amounts which diminished the decedent’s receipt of trust income by almost $17 million.  The CPA-trustee requested the court to order he and the other trustee to pay this amount, plus interest, to the estate from the trust’s income.  However, the decedent’s children (appointed as limited administrators of their mother’s estate) filed a petition claiming that there had been an overdistribution of $3.27 million from the trust to the surviving spouse.  The matter was litigated for a decade and the parties reached a settlement agreement that the trust would pay the estate $9.2 million which represented unpaid income of $6.5 million and $2.7 million in fees from January 1, 2002, through 2005. 

The executor of the surviving spouse’s estate (the CPA who was also a co-trustee of the QTIP trust) filed Form 706 (federal estate tax return) in early 2007 reporting “other miscellaneous property” of $31,869,441 including $4,632,489 of undistributed income from the pre-deceased spouse’s estate and a yet to be determined claim of the estate against the trustees of the pre-deceased husband’s trust for loss of profits, excess taxes paid, interest and other damages.  The children filed a Form 706 on the same day that mirrored the executors’ Form 706, but also included the assets of their father’s trust – another $43.3 million (which included the 98.5 percent FLP interest and the cash and marketable securities). 

The IRS position and the Tax Court.  The IRS issued a notice of deficiency asserting that the trust’s value of the 98.5 percent FLP interest was $105,664,857 instead of $42.465 million as reported on the limited administrators’ Form 706.  The IRS also reduced the estate’s assets by the value of the pending claim against the trust.  The executors and the limited administrators both filed a Tax Court action claiming that the IRS’ reduction of the gross estate by the $4.632,489 of the estate’s claim against the trust.  The executors claimed that the pending claim should be included in the gross estate at $16,946,827, and the limited administrators asserted that the value of the trust should be reduced by the amount of any claim allowed for undistributed income due the estate from the trust and the resulting net value be included in the gross estate under I.R.C. §2044.  Thus, the issues before the Tax Court were (1) whether the value of the QTIP trust assets included in the surviving spouse’s gross estate should be reduced by the agreed-upon undistributed income amount; and (2) whether the surviving spouse’s estate could deduct any part of that undistributed income as an administration expense under I.R.C. §2053.  The estate asserted that the gross estate should be reduced, and an administration expense could be claimed.  The IRS disagreed. 

Note:  The executors and limited administrators stipulated that the value of the trust’s FLP interest at the date of the decedent’s death was $54,492,712. 

The Tax Court noted that under I.R.C. §2044(a), the QTIP trust property was to be included in the surviving spouse’s gross estate at fair market value as of the date of her death.  Thus, the stipulated value of the trust’s FLP interest plus the cash and marketable securities of $55,327,712 was included in her gross estate.  The Tax Court disagreed with the assertion that the gross estate should be decreased by the amount of the agreed-upon settlement amount.  The Tax Court pointed out that by the terms of the trust, the FLP was not liable for the settlement payment and, as such, the liability had no impact on the date of death fair market value of the trust’s FLP interest.  The Tax Court agreed with the assertion of the IRS that the trust would have an offsetting claim against third parties for the undistributed income payment liability.  In addition, the enhanced value of the surviving spouse’s gross estate increased the estate’s charitable contribution by a like amount.  The Tax Court also concluded that the estate was not entitled to deduct any part of the agreed-upon settlement payment other $838,044 attributable to paying out commissions.   

Estate Planning and Family Structure

The Kalikow case presents an interesting illustration of the family dynamics that estate planners often must deal with.  This apparently was not a second marriage situation for either spouse – at least there is no indication of that by the Tax Court.  This raises a question as to why a QTIP trust was created under the terms of the husband’s will?  Did he suspect that if his wife survived him that she would disinherit their children?  Were there creditor issues?  The husband died at age 70 after battling Parkinson’s disease for 36 years.  Indeed, her will left the residue of her estate to charity rather than the children.  Also, the co-trustees of the QTIP trust were a son, a non-family member CPA and the surviving spouse.  After the death of the surviving spouse, their daughter was added as a co-trustee.  But neither child was an executor of their mother’s estate.  Were they estranged?  The Tax Court opinion doesn’t shed any light on that question either.

Clearly, planners must think about the potential for conflict between the surviving spouse and the remainder beneficiaries that a QTIP trust can create.  Those conflicts typically involve investment decisions, tax strategies and the administration of the trust.  These conflicts are caused ty the surviving spouse not having any control over the trust and that the final disposition of the trust remains subject to the prior deceased spouse’s control.  This means that the planner must carefully evaluate the relationship between the surviving spouse and the remainder beneficiaries and whether the surviving spouse has income and assets outside the QTIP trust. 

It is a bit puzzling why a QTIP trust was utilized in Kalikow – a multimillion-dollar estate.  With a QTIP trust, the trustees had no ability to allocate trust income and principal among the next generation of family members as a long-term tax minimization strategy.  While a basis step-up of the QTIP assets is achieved in the surviving spouse’s estate, in such a large estate as Kalikow, the unified credit is woefully inadequate to eliminate estate tax in the survivor’s estate.  That might explain the charitable gift of the remainder of the surviving spouse’s assets, but if that is a correct assumption why not simply utilize a standard credit shelter trust and give the surviving spouse the power to control the assets consistent with optimal tax planning?  Also, the difference in the beneficiaries of the surviving spouse’s estate and the QTIP trust triggers a tax apportionment “tax trap” that pegs the estate tax liability on the assets of the QTIP trust. 

The Kalikow estate also involve overlapping roles of fiduciaries and professionals – the family CPA was also a co-trustee and executor.  Rarely is that structure recommended.  With the inherent conflict given the differences between the disposition of the surviving spouse’s estate and what had been established via the QTIP, perhaps the FLP could have been structured in a manner to help minimize conflict. 

Conclusion

In the end, the QTIP was valued at approximately $55 million (pre-tax) and the unpaid income amount was settled at around $6.5 million.  The legal fees are not known, but they would have been substantial.  The family litigation dragged on for over a decade.  Was it worth it? 

QTIP trusts can be beneficial, and they do have their place, but clearly they are not for everyone.  Estate planning is difficult and often there is a need to coordinate the planning over subsequent deaths and even subsequent generations.

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

Overview

A minority of states along with the District of Columbia recognizes common-law marriages.  But, even in these states, it’s not enough to just simply live together for a certain amount of time.  That’s a common misconception. 

Common law marriage – it’s the topic of today’s post.

Background

Whether a couple is in a common law marriage can be an important issue when it comes to inheritance rights, spousal rights in land, and liabilities for a spouse’s debts, among other issues.  That makes it important to know the requirements for a common law marriage.  One common requirement of a common law marriage in the states that recognize the concept is that the couple must hold themselves out to the public as married persons.  There are various ways that can be done, including using the same last names and filing joint tax returns.  Each state that recognizes common-law marriage sets forth certain tests that must be followed to establish the relationship. 

Kansas Cases

The issue of whether a common law marriage existed has been litigated in two recent Kansas cases.  These cases follow another Kansas case on the issue in 2010. 

In re Marriage of Dyche, No. 97,639, 2008 Kan. Unpub. LEXIS 508 (Kan. Ct. App. Aug. 8, 2008); related proceeding at Beat v. United States, 742 F. Supp. 2d 1227 (D. Kan. Aug. 2010), recon. den., No. 08-1267-JTM, 2010 U.S. Dist. LEXIS 114139 (D. Kan. Oct. 26, 2010); further opinion at No. 08-1267-JTM, 2011 U.S. Dist. LEXIS 40501 (D. Kan. Apr. 12, 2011). 

In Kansas, a couple must satisfy three requirements to be in a common law marriage – 1) they must have the capacity to marry; 2) they must agree to be married and represent to the public that they are married.  The first two tests typically aren’t difficult to establish, but the third one – a public representation of the marital relationship – is more difficult. 

In this case, a Kansas farmer died in 2001, leaving his entire multi-million-dollar estate to his partner (Theresa Beat) who claimed she was the decedent’s common-law wife.  They had been in a “relationship” for over twenty years beginning at a time that they were both married to other persons.  She was named the executor and claimed a 100 percent marital deduction on the decedent’s federal estate return and Kansas inheritance tax returns for the entire value of the estate.  That wiped out tax at both the federal and state levels.  But both the IRS and the Kansas Department of Revenue (KDOR) disagreed with her characterization as the decedent’s common-law wife.  If she was not the decedent’s spouse at the time of his death, then the estate could not claim any marital deduction with the result that a substantial amount of tax would be due at both the federal and state levels – with interest and penalties. 

In 2005, the “widow” filed a motion with the county trial court, seeking a determination that she was the common-law wife of the decedent. She claimed that they had been “married” for 20 years, had a monogamous relationship and held themselves out in the community as being married.  She stated that she even wore his ring for most of the “marriage.”  There was no question that they had the capacity to marry after they each were divorced from their respective spouses and the statutory waiting period for a subsequent marriage had expired.  But the IRS and KDOR claimed that they had substantial evidence that there was no valid common-law marriage.  Also, the KDOR pointed out that the “wife” failed to exhaust administrative remedies by prematurely filing suit with the trial court.  The KDOR claimed it had primary jurisdiction to determine marital deduction issues.  The IRS also intervened and got the case removed to federal court.  The court granted the IRS’ motion to dismiss for a lack of subject matter jurisdiction because the court determined that it did not yet have the authority to rule on the “wife’s” pre-enforcement allegations for her failure to exhaust administrative remedies.  The court remanded the case to the local trial court for a determination of all other issues. 

In July 2006, the “widow” submitted 165 paragraphs of “uncontroverted facts” asserting her status as common-law wife. She also submitted a wealth of affidavits, deposition testimony and other exhibits to prove her status as a common-law wife.  The court found several “facts” compelling, including the exchange of rings.  Additionally, the decedent’s daughters referred to the “wife” as their stepmother, the community considered them a couple, the decedent referred to her as his “old-lady,” and he also identified her as “next of kin” on several important documents. The couple established a successful farming business in which they worked together every day. There was additional evidence presented indicating that the couple even went on a “honeymoon” in Hutchinson, Kansas, where the couple agreed to be common-law married at a restaurant and he “carried her over the threshold” of their motel room.  But, she couldn’t the specific date of the “honeymoon.”

The IRS and KDOR moved for dismissal of the case alleging that the couple identified themselves as “single” on several land deeds, filed separate income tax returns, and filed for Social Security benefits as single individuals. The decedent’s ex-wife also testified that she rarely heard her ex-husband refer to his new friend as his “wife” and that the rings were never referred to as wedding bands.  Additionally, the decedent intentionally prepared his will as a single person and indicated on his children’s application for college aid that he was unmarried. 

In a procedural determination, the trial court struck her “affidavit of uncontroverted facts” as not having been properly submitted.  On motions of the state and federal government for summary judgment, the court set forth 138 factual findings based upon their assessment of the pleadings and other evidence.  The court granted the motions, stating that the parties put “different spins on the same set of facts.”  The court stated that there were not enough “controverted” facts for the case to proceed to trial. 

The trial court set forth the three essential elements to establish a common-law marriage in Kansas – (1) the parties must have the capacity to marry; (2) the parties must mutually agree to be presently married; and (3) the parties must mutually hold themselves out to the public as husband and wife. The trial court stated that her evidence was purely subjective and there was not enough verifiable evidence that the couple had established a common-law marriage. The court concluded that the parties did have the capacity to marry, but there was no mutual agreement to marry.  The only direct evidence of an agreement to marry was her testimony regarding the Hutchinson “honeymoon.”  However, there was no supporting evidence offered to establish that the couple really had a “present agreement” to marry.  As to the third element, the trial court found that the parties never signed any documents representing that they were a married couple.  Probably the most damaging evidence cited by the IRS and KDOR was that the decedent executed his will as a single person and refused to refer to her as his wife.  Despite his attorney’s suggestions that they formalize the marriage, the decedent indicated that he left the plaintiff with enough assets to cover any estate tax or inheritance liability.  The court went so far as to state the “widow” completely failed to prove a common-law marriage.   

On appeal, the appellate court disagreed with the trial court’s granting of the motion for summary judgment in favor of IRS and KDOR. They found that there was a “considerable amount of evidence” that should have been weighed by the judge or a jury.  In essence, the appellate court held that the determination of the existence of a common-law marriage was a fact question to be determined by a jury.  One of these “problems” with the trial court’s determination was that there was (according to the appellate court) ample evidence to suggest that the couple held themselves out as a married couple. The appellate court went on to state that even though a couple never tells any member of his or her family or the public that they are actually married, that does not necessarily preclude a common-law marriage in Kansas.  The appellate court believed that there were other factual indications that the couple held themselves out to the public as husband and wife. 

Finally, the appellate court determined that the trial court improperly weighed the evidence in favor of the KDOR and IRS.  The appellate court determined that the trial court utilized “objective” evidence and, as such, improperly “weighed” the evidence during the summary judgment motions.  In the appellate court’s view, a weighing of the evidence should have taken place only during a trial.  On remand, the sole issue before the trial court was whether the couple had established a common-law marriage.  The matter of an estate tax refund was not ripe because the decedent’s estate had not yet filed a claim for refund.

On the later tax refund action back in federal court, the court was unimpressed by the “widow’s” arguments.  Indeed, the court noted that a rational factfinder could conclude that no common-law marriage existed and that the evidence supporting a common-law marriage was so lacking that her estate tax refund claim could be considered fraudulent.  The court noted that the decedent and the “widow” went to great lengths to conceal their relationship from family and neighbors.  The court also determined that the doctrine of consistency should be applied – for over two decades they represented themselves to the IRS on their federal tax returns that they were not married.  Accordingly, the court denied her motion for a refund of estate tax based on the marital deduction.  

But, at a later trial in the federal court on the issue of whether a common-law marriage existed, the jury determined that a common law marriage had been established.  The IRS had claimed that she owed $1.4 million in estate tax, another $1 million for fraud and $434,000 in interest associated with tax liabilities.  On further review, the court allowed the deduction for interest expense and ordered a refund of interest on an assessed fraud penalty. 

In re Common-Law Marriage of Heidkamp, No. 125,617, 2023 Kan. LEXIS 13 (Kan. Sup. Ct. Mar. 31, 2023)

In this case, the plaintiff sought a judicial confirmation that she had been in a common law marriage with her husband at the time of his death.  She based this assertion on the belief that a common law marriage existed after they had lived together for seven years.  The trial court confirmed that a common-law marriage existed based on the facts that the parties had the legal capacity to marry, mutually agreed that they were married, conducted themselves as if they were married, and held themselves out to the public as a married couple.  They lived together; paid all of their utilities under the same name; made joint charitable contributions; had a joint savings account; owned multiple pieces of real estate together; were listed as each other’s beneficiaries on IRA accounts; called each other “husband” and “wife” at family events and in social settings; and attended medical appointments as a married couple.  The plaintiff appealed due to the U.S. Supreme Court’s ruling in Commissioner v. Estate of Bosch, 387 U.S. 456 (U.S. 1967), where the Supreme Court held that the IRS and federal courts are not bound by lower state court decisions.   The Kansas Supreme Court considered all the evidence presented at the trial court and affirmed the trial court’s findings.

In re Estate of Gray, No. 124,085, 2023 Kan. App. Unpub. LEXIS 153 (Kan. Ct. App. Mar. 31, 2023)

In this case, the decedent died unexpectedly and intestate.  He had been living in Kansas for several months where he was taking care of his mother’s affairs following her death.  Prior to that, he had lived in Texas for five years with a woman he was not married to.  He had inherited a home in Kansas from his mother and his death certificate listed his Kansas home as his residence and his marital status as “never married.”  The decedent did have a biological son.  Eight months after his death, the woman in Texas executed a deed purporting to sell the home to another man in Texas and his company, claiming to have been the decedent’s surviving common-law wife and sole heir.  Her name was not on the title to the house.  The sale price was indicated as $10,000 while a private appraiser had valued the home at $30,000.  Five months later, the court-appointed administrator sold the home for $30,000, subject to the probate court’s approval.  The administrator also filed a motion with the probate court to set aside the prior deed as invalid because the woman had no legal interest in the home. 

At an evidentiary hearing, no witnesses were aware that the decedent was married at the time of death.  The decedent’s son did not believe that his father was married and testified that another woman who was purportedly his father’s girlfriend sent him money periodically.  While the woman alleging to be the decedent’s common-law wife produced letters the decedent had written to her as his “wife” and received mail in her name at their Texas residence, they never had a formal wedding ceremony even though she claimed that they had planned to get married when he returned from Kansas.  She also had a life insurance policy that named her daughter as the primary beneficiary and the decedent (designated as her fiancé) as the contingent beneficiary.  In addition, shortly before his death, the decedent opened a bank account in his name only and designated the pay-on-death beneficiary as the administrator of his mother’s estate.  He also listed his Kansas house as his home address for the account.  The couple also never filed joint tax returns, and he was not on the title to her Texas house.  

The trial court determined that there was no common-law marriage, and that the administrator had the authority to sell the decedent’s home.  The trial court also found that the buyer was not a bona fide purchaser and that even if he were, the sale had to be first authorized by the probate court and a title company had so informed the buyer.

The appellate court affirmed on all points.  The couple did not have any present agreement to marry – a required element of a common-law marriage in both Texas and Kansas. The appellate court noted that a present agreement meant an intent to be married, rather than an intent to get married.   The appellate court also pointed out that Kansas law (K.S.A. §59-2305(b)) requires that a private sale of a decedent’s real estate must be 75 percent or more of the appraised value.  As such, the sale for one-third of the appraised value was impermissible. 

Conclusion

Common-law marriage is recognized by statute in some states (CO, IA, KS, MT, NH, SC, TX and UT), is recognized by caselaw in RI and OK, and is grandfathered in other states if it was established before a certain date (PA, OH, IN, GA, FL, AL).  However, the requirements for legally establishing a common-law marriage differ among the states that recognize the concept.  In any event, the cases discussed above point out that not formalizing the marital relationship can lead to substantial legal issues and disrupt what might otherwise have been a desired disposition of property at death.

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

Overview

Taxpayers have numerous options for saving for retirement, whether working for an employer or self-employed.  But, there are limitations that apply to how much can be deposited each year into a retirement account and other rules apply that specify when distributions from retirement accounts must begin.  If distributions are not taken when they should, penalties can apply. 

The rules can be tricky, and the Congress has modified the rules in recent years.  One of those changes applies to some people and will require the beginning of distributions (a required minimum distribution (RMD)) from certain retirement accounts by April 1, 2023 – tomorrow.

Rules involving RMDs from retirement accounts – it’s the topic of today’s post.

RMDs

Funds cannot be kept in a retirement account indefinitely.  In general, distributions must be made from an IRA, SIMPLE IRA, SEP IRA, or retirement plan account when the account owner reaches age 72 (73 if age 72 is attained after Dec. 31, 2022).  Normally, an RMD must be made by the end of the year.  But, for those turning 72 during 2022, the first RMD may be made as late as April 1, 2023.  This rule applies to IRAs, 401(k)s and similar workplace retirement accounts. 

Note:  For persons with a Roth IRA, funds need not be withdrawn during life.  But the beneficiaries of the account are subject to the RMD rules. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. 2023 RMDs must be taken by April 1, 2024.  However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.

This April 1 rule only applies for the first year that an RMD is required.  For later years, the RMD must be made by the end of the year – December 31.  As a result, any taxpayer that received their RMD for 2022 in 2023 (on or before April 1 of 2023) must also receive their RMD for 2023 by the end of 2023.  This means that both distributions will be taxable in 2023. 

Employees.  Individuals that are still employed by the plan sponsor, and who are not a 5 percent owner, may delay taking RMDs from workplace retirement plan until they retire, if the plan so allows.  But, even those that are still employed must begin taking an RMD starting at age 72 from traditional IRAs, SEP, SIMPLE and SARSEP IRA plans. 

Plans requiring an RMD.  As noted above, RMDs are not required with respect to Roth IRAs.  Likewise, for 2024 and later years, RMDs aren’t required to be taken from designated Roth accounts.  The RMD rules, however, apply to traditional IRAs, SEPs and Simple IRAs during the owner’s life.  RMDs are also required to be taken by owners of 401(k) plans, 403(b) and 457(b) plans. 

Age change.  While the rule as to when an account owner must start taking an RMD has been the year in which the owner reaches age 72, starting in 2023, the required RMD must begin for the year in which the account owner turns 73.  In other words, for account owners that turned 72 in 2022, the first RMD must be taken by April 1, 2023, with the RMD computed based on the account balance as of the end of 2021.  For those reaching age 72 in 2023, there is no RMD requirement for this year.  Instead, the first RMD will be for 2024 because that will be the year in which the individual will turn 73.  The first RMD for these persons must be taken by April 1, 2025.

Meeting RMD Requirements.  The RMD requirement can be satisfied by withdrawing from multiple accounts – traditional IRAs, SEPs, SIMPLEs and SARSEPs.  Withdrawals need not be taken from each account the owner holds.  What is required is that the total withdrawals must be at least what the total RMD requirement.

Calculating the RMD.  The IRS provides Publication 590 to assist in computing the RMD.  Publication 590 contains RMD tables that are used to calculate the RMD.  Basically, from the table an account owner will locate their age on the IRS Uniform Lifetime Table, find the “life expectancy factor” corresponding to their age, and then divide the account balance as of December 31 of the prior year by the current life expectancy factor.  The computation is different if the account owner’s spouse is the only primary beneficiary and is more than 10 years younger than the owner.  In that instance, the IRS Joint Life and Last Survivor Expectancy Table (contained in Pub. 590) is used.  The account owner’s life expectancy factor is based on the ages of both the account owner and spouse.  The formula, however, does not change. 

For persons with multiple retirement plans, the RMD is to be calculated separately for each plan.  But the RMDs can be combined, and the total amount withdrawn from a single plan or any combination of plans. 

Conclusion

RMDs from retirement plans can be confusing, and for those with multiple accounts it’s probably best to consult with a financial and/or tax advisor to help with determining the best withdrawal strategy.

Summer Seminars

Overview

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

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

Day 1 Itinerary

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

7:30-8:00 a.m. – Registration

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

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

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

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

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

9:45–10:05 a.m. – Morning Break

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

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

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

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

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

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

11:45–12:45 p.m. – Luncheon

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

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

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

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

2:25-2:45 p.m. – Afternoon Break

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

 

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

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

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

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

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

4:25 p.m. - Adjournment

Day 2 (farm estate and business planning track)

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

7:30-8:00 a.m. — Registration

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

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

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

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

9:45-10:05 a.m. — Morning Break

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

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

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

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

11:45-12:45 p.m. — Lunch

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

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

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

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

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

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

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

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

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

4:25 p.m. — Conference adjourns

 

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

7:30-8:00 a.m. — Registration  

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

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

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

9:45-10:05 a.m. — Morning Break  

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

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

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

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

11:45-12:45 p.m. — Lunch  

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

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

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

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

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

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

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

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

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

4:25 p.m. — Conference adjourns 

Conclusion

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

More details and registration links coming soon.

Happenings in Agricultural Law and Tax

Overview

The legal issues in agricultural law and tax are seemingly innumerable.  The leading issues at any given point in time are often tied to the area of the country involved.  In the West and the Great Plains, water and grazing issues often predominate.  Boundary disputes and lease issues seem to occur everywhere.  Bankruptcy and bankruptcy taxation issues are tied to the farm economy and may be increasing in frequency in 2023 – the USDA projects net farm income to be about 16 percent lower in 2023 compared to 2022.  Of course, estate planning, succession planning and income tax issues are always present.

With today’s post, I take a look at some recent cases involving ag issues.  A potpourri of recent cases – it’s the topic of today’s post.

Dominant Estate’s Water Drainage Permissible.

Thill v. Mangers, No. 22-0197, 2022 Iowa App. LEXIS 961 (Iowa Ct. App. Dec. 21, 2022)

The plaintiffs sued their neighbor, the defendant, for nuisance. Rainwater from the defendant’s property would run off onto the plaintiffs’ property.  In the 1950s and 1960s the city installed a few culverts to help with the water drainage. The water drained into an undeveloped ground area where the plaintiffs later built their home. The plaintiffs tried numerous ways to block the flow, ultimately causing drainage problems for the defendant who then tried to direct the excess water back onto the plaintiffs’ property.  The plaintiffs claimed that defendant’s activity caused even more damage to their property than had previously occurred, causing a neighbor to also complain.  All of the parties ended up suing each other on various trespass and nuisance claims.  The trial court dismissed all of the claims because the court believed that all of the parties’ actions caused the water drainage problems. The appellate court explained that the defendant, as the owner of the dominant estate, had a right to drain water from his land to the servient estate (the plaintiffs’ property) and if damage resulted from the drainage, the servient estate is normally without remedy under Iowa Code §657.2(4). The only time a servient estate could recover damages is if there is a substantial increase in the volume of the water draining or if the method of drainage is substantially changed and actual damage results.  Under Iowa law, the owner of the servient estate may not interrupt or prevent the drainage of water to the detriment of the dominant owner. The plaintiffs argued that the defendant violated his obligation by installing a berm and barricade, and presented expert testimony showing that the water flow changed when the defendant added the features, but the defendant had his own expert who provided contrary testimony.  The appellate court held that the defendant’s expert was more reliable because the defendant’s expert used more historical information and photographs to analyze how the water historically flowed rather than focusing on the current condition of the neighborhood as did the plaintiffs’ expert. When the plaintiffs’ expert looked at these historical photographs, he even agreed with the defendant’s expert that the natural flow of water was through the culverts onto the plaintiffs’ property. The appellate court affirmed the trial court’s finding that the plaintiffs did not prove that the defendant substantially changed the method or manner of the natural flow of water, because the water would have flowed the same way with or without the defendant’s berm and barricade. 

Mortgage Interest Deduction Disallowed 

Shilgevorkyan v. Comr., T.C. Memo. 2023-12

The petitioner claimed a mortgage interest deduction for 2012 associated with a home that his brother purchased for $1,525,000 in 2005.  The purchase was financed with a bank loan.  The brother and his wife were listed as the borrowers on the loan.  The brother (and wife) and another brother also took out a $1,200,000 construction loan.  Both loans were secured by the home.  The construction loan was used to build a separate guesthouse on the property.  In 2010, one brother executed a quit claim deed in favor of the petitioner with respect to the property.  During 2012, the petitioner didn’t make any loan payments and was not issued a Form 1098 for the year.  While the petitioner lived in the guesthouse for part of 2012, he did not list the property as being his place of residence or address.  On his 2012 return, the petitioner claimed a $66,354 deduction for one-half of the total mortgage interest paid for the year as reported on Form 1098 that was issued to his brother and his brother’s wife.  The IRS disallowed the deduction and the Tax Court agreed.  The petitioner failed to prove that the debt on the property was his obligation, did not show ownership (legal or equitable) in the property, and the quitclaim deed did not convey title to him under state law.  The Tax Court also determined that the petitioner failed to establish that the residence was his “qualified residence.” 

Charitable Deduction Case Will Go to Trial on Numerous Issues

Lim v. Comr., T.C. Memo. 2023-11

During 2016 and 2017, the petitioners (a married couple) were the sole shareholders of an S corporation.  In late 2016, after making a presentation to the petitioners concerning “The Ultimate Tax, Estate and Charitable Plan,” an attorney formed a “Charitable Limited Liability Company” for the petitioners to use as a vehicle for making charitable donations.  The attorney agreed to transfer assets to the LLC, to transfer LLC units to a charity and to provide the supporting valuation documentation for the donation.  He also agreed to represent them before the IRS and the Tax Court if the return(s) were later examined.  His fee would be the greater of $25,000 or 6 percent of the “deductible amount” of assets capped at $1 million, plus 4 percent of the “deductible amount” of assets exceeding $1 million.  The assets transferred to the LLC were five promissory notes with a face amount of $2,008,500.   This generated a fee for the attorney of $84,000 based on a presupposed “deductible amount” of $1,600,000 even though the assets were not appraised until late January of 2017, which valued them at $1,600,000. The fee was to be paid in installments over six months beginning in January of 2017.

The attorney also created a second LLC in late December of 2016 with the petitioners as the managers, the attorney as the registered agent, and the petitioners’ S corporation as the single member.  Petitioners promised to pay the second LLC $2,008,500 (the promissory notes) in seven years.

The charitable recipient was a Foundation (an I.R.C. §501(c)(3) organization) for which the attorney was the registered agent.  The petitioners claimed that their S corporation donated “units” of the second LLC to the Foundation and claimed a charitable deduction.  The IRS denied the deduction, partly on the basis of a lack of evidence that any property was actually transferred to the Foundation. The petitioners did not offer any explanation as to when or how the “units” were created or what physical form they took.  The petitioners also claimed that they received an acknowledgement letter of the donation from the Foundation dated January 1, 2017.  The letter referred to 1,000 units of an LLC that did not exist during 2016 or as of January 1, 2017.  It was not addressed to the S corporation, but to the petitioner (wife) at their residence in a different city than the S corporation.  The letter also was not signed by any person and appeared to be a form letter with taxpayer-specific information in bold font.  It also did not refer to any property that the S corporation allegedly donated on December 31, 2016.

On January 4, 2017, the attorney submitted an appraisal, but it lacked substance.  The appraisal asserted that LLC interests were donated to the Foundation in 2016, but did not denote how many interests had been contributed.  The claimed charitable deduction was $1,608,808.  The attorney also attached his curriculum vitae stating that he was a CPA, a certified valuation analyst and a licensed attorney in Kentucky.  Also attached to the appraisal was a one-page “certification” on which the attorney stated that his fee was not contingent on the report in any manner and that he didn’t have any interest or bias with respect to the parties involved.  This was despite his having arranged the entire transaction and being the registered agent for the second LLC.

The S corporation filed Form 1120S for 2016 and attached a copy of the appraisal and Form 8283 which described the donated property as “LLC units” with a basis of $2,008,500 that had been acquired by purchase, and an “appraised market value” of $1,608,808.  The petitioners reported a non-cash charitable deduction of $1,608,808 on Schedule A that flowed through to them from the S corporation.  Because the amount of the deduction exceeded the maximum allowable deduction for 2016, they claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 to their 2017 return.

The IRS audited the petitioners’ 2016 and 2017 returns and disallowed the charitable deductions for lack of substantiation.  The petitioners challenged the disallowance in the Tax Court and the IRS moved for partial Summary Judgment.  The Tax Court determined that the appraisal was not a “qualified appraisal” within the meaning of I.R.C. §170(f)(11)(C). Treas. Reg.  §1.170A-13(c)(6)(i) requires, among other things, that “no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.”  Accordingly, the attorney’s fee was a prohibited appraisal fee within the meaning of the regulation.  However, the Tax Court held that the petitioners had shown reasonable cause for failure to comply with the substantiation requirements of I.R.C. §170.  They had presented sufficient proof that they relied upon professionals in claiming the charitable contribution deduction.  Accordingly, the Tax Court denied the IRS summary judgment on this issue.  The Tax Court also denied summary judgment to the IRS on the issue of whether the written acknowledgement was a “contemporaneous written acknowledgement” of the contribution in accordance with I.R.C. §170(f)(8)(A).  Accordingly, the Tax Court granted the Summary Judgment motion of the IRS in part, while the remaining issues will be set for trial. 

Note:  In 2018 the Department of Justice filed a complaint against the attorney, alleging that he promoted the “Ultimate Tax Plan” as a tax evasion scheme. He was accused of running a $35 million federal tax advice scam offering fake deductions using three bogus charities for 19 years. The complaint alleged that he was at the helm of "a national charitable-giving tax scheme" that targeted "wealthy individuals in high tax brackets facing large tax liabilities.”  He settled with the Government and agreed to a permanent injunction. On April 26, 2019, the U.S. District Court for the Southern District of Florida entered a final judgment of permanent injunction against him, holding that he had engaged in conduct penalizable under I.R.C. §6700 by promoting the “Ultimate Tax Plan.” The court permanently enjoined him from, among other things, promoting “the Ultimate Tax Plan or any plan or arrangement that is substantially similar.” The court ordered the attorney to perform other actions as well in relation to the plan.

Document Filed with FSA Not a Valid Lease

Coniglio v. Woods, No. 06-22-00021-CV, 2022 Tex. App. LEXIS 8926 (Tex. Ct. App. Dec. 7, 2022)

Involved in this case was land in Texas that the landowner’s son managed for his father who lived in Florida. The landowner needed the hay cut and agreed orally that the plaintiff could cut the hay when necessary.  The hay was cut on an annual basis.  So that he could receive government farm program payments on the land, the plaintiff filed a “memorialization of a lease agreement” with the local USDA Farm Service Agency (FSA).  The landowner’s son also signed the agreement at the plaintiff’s request, but later testified that he didn’t believe the document to constitute a written lease.  After three years of cutting the hay, the landowner wanted to lease the ground for solar development, and the plaintiff was told that the hay no longer needed to be cut and there would be no hay profits to share.  The plaintiff sued for breach of a farm lease agreement. The trial court ruled in favor of the plaintiff on the basis that the form submitted to the USDA was sufficient to show the existence of a lease agreement.  On appeal, the defendant claimed that the document filed with the FSA did not satisfy the writing requirement of the statute of frauds.  The appellate court agreed, noting that the document didn’t contain the essential terms of the lease.  It didn’t denote the names of the parties, didn’t describe the property, didn’t note the rental rate, and didn’t list any conditions or any consideration.  Accordingly, the appellate court determined that no valid lease existed and reversed the trial court’s judgment.

Conclusion

I’ll provide another summary of recent cases in a subsequent post.

Tax Court Opinion - Charitable Deduction Case Involving Estate Planning Fraudster

Overview

The rules surrounding charitable giving can be rather complicated when the gift is not of cash and is of a significant amount. Those detailed rules were at issue in a recent U.S. Tax Court case.  What made the case even more interesting was that it also involved taxpayers that got themselves connected with an estate planning and charitable giving fraudster that the U.S. Department of Justice eventually shut down.  This is the second significant Tax Court decision in the past six months involving charitable giving.  The Furrer farm family of Indiana was involved with a charitable remainder trust scenario that was structured completely wrong (see my blog article here: https://lawprofessors.typepad.com/agriculturallaw/2022/12/how-not-to-use-a-charitable-remainder-trust.html) and now another case.

The rules on charitable giving and a recent case involving a chartable giving scam.  It’s the topic of today’s blog article.

Background

The Tax Code allows a deduction for any charitable contribution made during the tax year.  I.R.C. §170(a)(1).  The amount must be “actually paid during the tax year” and the taxpayer bears the burden to prove the surrender of dominion and control over the property that was contributed to a qualified charity.  See, e.g., Pollard v. Comr., 786 F.2d 1063 (11th Cir. 1986); Goldstein v. Comr., 89 T.C. 535 (1987); Fakiris v. Comr., T.C. Memo. 2020-157.

For charitable contributions consisting of anything other than money, the amount of the contribution is generally the fair market value of the property at the time of the contribution.  Treas. Reg. §1.170A-1(c)(1).  For non-cash contributions exceeding $5,000 (at one time), the taxpayer must obtain a “qualified appraisal” of the property.  I.R.C. §170(f)(11)(C).  This includes attaching to the return a fully completed appraisal summary on Form 8283.  Id.; Treas. Reg. §1.170A-13(c)(2).  When a non-cash contribution exceeds $500,000, a copy of the appraisal must be attached to the return.  I.R.C. §170(f)(11)(D).  If the donor is an S corporation or a partnership, the qualified appraisal requirement is the obligation of the entity and not the members or shareholders.  Id. 

A “qualified appraisal” is one that is conducted by a “qualified appraiser” using generally accepted appraisal standards and otherwise satisfies the applicable regulations.  A qualified appraisal is “qualified” only if it is “prepared, signed, and dated by a qualified appraiser.”  Treas. Reg. §1.170A-13(c)(3)(i)(B).  There are 11 categories of information that the appraisal must include.  Id. subdiv. (ii).  One of those is that “[N]o part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.”  Treas. Reg. §1.170A-13(c)(6)(i).  See also Alli v. Comr., T.C. Memo. 2014-15. 

There is a reasonable cause exception for failing to satisfy the substantiation requirements.  I.R.C. §170(f)(11)(A)(ii)(II). To use the reasonable cause exception, the taxpayer must show that willful neglect is not present based on the facts and circumstances.  If the exception applies, the charitable deduction may be allowed.  See, e.g., Belair Woods, LLC v. Comr., T.C. Memo. 2018-159.   

Recent Case

In Lim v. Comr., T.C. Memo. 2023-11, during 2016 and 2017, the petitioners (a married couple) were the sole shareholders of an S corporation.  In late 2016, after making a presentation to the petitioners concerning “The Ultimate Tax, Estate and Charitable Plan,” an attorney formed a “Charitable Limited Liability Company” for the petitioners to use as a vehicle for making charitable donations.  The attorney agreed to transfer assets to the LLC, to transfer LLC unites to a charity and to provide the supporting valuation documentation for the donation.  He also agreed to represent them before the IRS and the Tax Court if the return(s) were later examined.  His fee would be the greater of $25,000 or 6 percent of the “deductible amount” of assets capped at $1 million, plus 4 percent of the “deductible amount” of assets exceeding $1 million.  The assets transferred to the LLC were five promissory notes with a face amount of $2,008,500.   This generated a fee for the attorney of $84,000 based on a presupposed “deductible amount” of $1,600,000 even though the assets were not appraised until late January of 2017 which valued them at $1,600,000. The fee was to be paid in installments over six months beginning in January of 2017.  

The attorney also created a second LLC in late December of 2016 with the petitioners as the managers, the attorney as the registered agent, and the petitioners’ S corporation as the single member.  Petitioners promised to pay the second LLC $2,008,500 (the promissory notes) in seven years. 

The charitable recipient was a Foundation (an I.R.C. §501(c)(3) organization) for which the attorney was the registered agent.  The petitioners claimed that their S corporation donated “units” of the second LLC to the Foundation and claimed a charitable deduction.  The IRS denied the deduction, partly on the basis of a lack of evidence that any property was actually transferred to the Foundation.  The petitioners did not offer any explanation as to when or how the “units” were created or what physical form they took.  The petitioners also claimed that they received an acknowledgement letter of the donation from the Foundation dated January 1, 2017.  The letter referred to 1,000 units of an LLC which did not exist during 2016 or as of January 1, 2017.  It was not addressed to the S corporation, but to the petitioner (wife) at their residence in a different city than the S corporation.  The letter also was not signed by any person and appeared to be a form letter with taxpayer-specific information in bold font.  It also did not refer to any property that the S corporation allegedly donated on December 31, 2016. 

On January 4, 2017, the attorney submitted an appraisal, but it lacked substance.  The appraisal asserted that LLC interests were donated to the Foundation in 2016, but did not denote how many interests had been contributed.  The claimed charitable deduction was $1,608,808.  The attorney also attached his curriculum vitae stating that he was a CPA, a certified valuation analyst and a licensed attorney in Kentucky.  Also attached to the appraisal was a one-page “certification” on which the attorney stated that his fee was not contingent on the report in any manner and that he didn’t have any interest or bias with respect to the parties involved.  This was despite him having arranged the entire transaction and being the registered agent for the second LLC. 

The S corporation filed Form 1120S for 2016 and attached a copy of the appraisal and Form 8283 which described the donated property as “LLC units” with a basis of $2,008,500 that had been acquired by purchase, and an “appraised market value” of $1,608,808.  The petitioners reported a non-cash charitable deduction of $1,608,808 on Schedule A that flowed through to them from the S corporation.  Because the amount of the deduction exceeded the maximum allowable deduction for 2016, they claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 to their 2017 return. 

The IRS audited the petitioners’ 2016 and 2017 returns and disallowed the charitable deductions for lack of substantiation.  The petitioners challenged the disallowance in the Tax Court and the IRS moved for partial Summary Judgment.  The Tax Court determined that the appraisal was not a “qualified appraisal” within the meaning of I.R.C. §170(f)(11)(C). Treas. Reg.  §1.170A-13(c)(6)(i) requires, among other things, that “no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.”  Accordingly, the attorney’s fee was a prohibited appraisal fee within the meaning of the regulation.  However, the Tax Court held that the petitioners had shown reasonable cause for failure to comply with the substantiation requirements of I.R.C. §170.  They had presented sufficient proof that they relied upon professionals in claiming the charitable contribution deduction.  Accordingly, the Tax Court denied the IRS summary judgment on this issue.  The Tax Court also denied summary judgment to the IRS on the issue of whether the written acknowledgement was a “contemporaneous written acknowledgement” of the contribution in accordance with I.R.C. §170(f)(8)(A).  Accordingly, the Tax Court granted the Summary Judgment motion of the IRS in part, while the remaining issues will be set for trial. 

Note:  In 2018 the Department of Justice filed a complaint against the attorney, alleging that he promoted the “Ultimate Tax Plan” as a tax evasion scheme. He was accused of running a $35 million federal tax advice scam offering fake deductions using three bogus charities for 19 years. The complaint alleged that he was at the helm of "a national charitable-giving tax scheme" that targeted "wealthy individuals in high tax brackets facing large tax liabilities.”  He settled with the Government and agreed to a permanent injunction. On April 26, 2019, the U.S. District Court for the Southern District of Florida entered a final judgment of permanent injunction against him, holding that he had engaged in conduct penalizable under I.R.C. §6700 by promoting the “Ultimate Tax Plan.” The court permanently enjoined him from, among other things, promoting “the Ultimate Tax Plan or any plan or arrangement that is substantially similar.” The court ordered the attorney to perform other actions as well in relation to the plan. 

Conclusion

When non-cash gifts are made to charity particular rules must be followed for a charitable deduction to be claimed.  Unfortunately, there are those engaged in unscrupulous techniques that prospective donors must be on the alert for.

Bibliography - July Through December 2022

Overview

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

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

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

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

Bankruptcy

More Ag Law Developments – Potpourri of Topics

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

Business Planning

Durango Conference and Recent Developments in the Courts

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

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

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

What is a “Reasonable Compensation”?

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

Federal Farm Programs: Organizational Structure Matters – Part Three

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

LLCs and Self-Employment Tax – Part One

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

LLCs and Self-Employment Tax – Part Two

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

Civil Liabilities

Durango Conference and Recent Developments in the Courts

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

Dicamba Spray-Drift Issues and the Bader Farms Litigation

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

Tax Deal Struck? – and Recent Ag-Related Cases

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

Ag Law and Tax Developments

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

More Ag Law Developments – Potpourri of Topics

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

Ag Law Developments in the Courts

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

Contracts

Minnesota Farmer Protection Law Upheld

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

Criminal Liabilities

Durango Conference and Recent Developments in the Courts

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

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

Environmental Law

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

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

More Ag Law Developments – Potpourri of Topics

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

Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland

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

Ag Law Developments in the Courts

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

Estate Planning

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

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

IRS Modifies Portability Election Rule

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

Modifying an Irrevocable Trust – Decanting

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

Farm and Ranch Estate Planning in 2022 (and 2023)

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

Social Security Planning for Farmers and Ranchers

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

How NOT to Use a Charitable Remainder Trust

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

Recent Cases Involving Decedents’ Estates

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

Medicaid Estate Recovery and Trusts

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

Income Tax

What is the Character of Land Sale Gain?

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

Deductible Start-Up Costs and Web-Based Businesses

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

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

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

Tax Deal Struck? – and Recent Ag-Related Cases

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

What is “Reasonable Compensation”?

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

LLCs and Self-Employment Tax – Part One

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

LLCs and Self-Employment Tax – Part Two

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

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

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

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

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

Ag Law and Tax Developments

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

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

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

More Ag Law Developments – Potpourri of Topics

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

IRS Audits and Statutory Protection

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

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

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

When Can Depreciation First Be Claimed?

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

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

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

Social Security Planning for Farmers and Ranchers

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

Are Crop Insurance Proceeds Deferrable for Tax Purposes?

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

Tax Issues Associated With Easement Payments – Part 1

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

Tax Issues Associated With Easement Payments – Part 2

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

How NOT to Use a Charitable Remainder Trust

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

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

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

Insurance

Tax Deal Struck? – and Recent Ag-Related Cases

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

Real Property

Tax Deal Struck? – and Recent Ag-Related Cases

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

Ag Law Summit

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

Ag Law and Tax Developments

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

More Ag Law Developments – Potpourri of Topics

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

Ag Developments in the Courts

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

Regulatory Law

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

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

The Complexities of Crop Insurance

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

Federal Farm Programs – Organizational Structure Matters – Part One

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

Federal Farm Programs – Organizational Structure Matters – Part Two

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

Federal Farm Programs: Organizational Structure Matters – Part Three

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

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

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

Minnesota Farmer Protection Law Upheld

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

Ag Law and Tax Developments

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

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

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

Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland

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

Ag Law Developments in the Courts

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

Water Law

More Ag Law Developments – Potpourri of Topics

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