Monday, May 6, 2024

Musings in Agricultural Law and Taxation – of Conservation Easements; IDGTs and Takings


The ag law and tax world continues to go without rest.  It’s amazing how frequently the law intersects with agriculture and rural landowners.  It really is “where the action is” in the law.  From the U.S. Supreme Court all the way to local jurisdictions, the current developments just keep on rolling.

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

An Easement is Not Worth More than the Underlying Property

Oconee Landing Property, LLC, et al. v. Comr., T.C. Memo. 2024-25

In the latest round of the continuing saga involving donated conservation easement tax fraud, the Tax Court uncovered another abusive tax shelter.  IRS guidelines make it clear that a conservation easement’s value is the value of the forfeited development rights based on the land’s highest and best use.  To qualify as a highest and best use, a use must satisfy four criteria: (1) the land must be able to accommodate the size and shape of the ideal improvement; (2) a property use must be either currently allowable or most probably allowable under applicable laws and regulations; (3) a property must be able to generate sufficient income to support the use for which it was designed; and (4) the selected use must yield the highest value among the possible uses. 

Note:  A tract’s highest and best use is merely a factor in determining fair market value. It doesn’t override the standard IRS valuation approach – that being the price at which a willing buyer and a willing seller would arrive at.  See, e.g., Treas. Reg. §1.170A-1(c)(2).  See also Boltar LLC v. Comr., 136 T.C. 326 (2011).

In this case, the taxpayer donated 355 acres of undeveloped land to a land trust.  The 355-acre tract was part of a larger tract that was a nationally recognized golf resort with associated developments.  When the larger tract wouldn’t sell, the taxpayer became interested in the possibility of granting a conservation easement on the 355 acres.  Ultimately, the taxpayer valued the 355 acres at about $60,000 per acre and claimed a charitable deduction for the entire amount - $20.67 million.  The IRS disallowed the deduction due to lack of donative intent – the entire scheme involved a pre-determined agreement to secure inflated appraisals so that investors would be able to deduct more than their respective investments. 

Note:  The amount of the deduction that can be claimed is subject to a limitation based on a percentage of the taxpayer’s contribution base.  I.R.C. §170(b)(1)(H).  However, if the donor is a “qualified farmer or rancher” and the donated property is used in agricultural or livestock production, the deduction may be up to 100 percent of the donor’s contribution base.  I.R.C. §170(b)(1)(E)(iv).  For corporate farms and ranches, see I.R.C. §170(b)(2)(B) and for the definition of a “qualified farmer or rancher” see I.R.C. §170(b)(1)(E)(v) and Rutkoske v. Comr., 149 T.C. 133 (2017). 

While the Tax Court determined that the donated easement had value, it agreed with the IRS that the value of the tract was approximately $5 million.  However, the lack of a qualified appraisal as the regulations require be attached to the return wiped out any associated deduction.  Simply setting a target value for the appraiser to hit coupled with the taxpayer’s knowledge that the value was overstated is not a qualified appraisal. 

Note:  Form 8283, Section B, as an appraisal summary must be fully completed and attached to the return for noncash donations greater than $5,000. 

In addition, the Tax Court pointed out that the 355-acre tract had been transferred to a developer (a partnership) who then donated the easement.  That meant that the donation was of ordinary income property which limited any deduction to the basis in the property.  Because there was no evidence offered as to the basis of the property, the deduction was zero.  I.R.C. §170(e)(1)(A).

For good measure, the Tax Court tacked on a gross overstatement penalty of 40 percent.  In determining the penalty, the Tax Court agreed with the IRS position that the highest and best use of the tract was as a “speculative hold for mixed-use development” and the easement was worth less than $5 million.  The Tax Court also tacked on a 20 percent penalty on the portion of the underpayment that wasn’t associated with the erroneous valuation. 

Note:  The rules associated with donated conservation easements are technical and must be precisely complied with.  While large tax savings can be achieved by donating a permanent conservation easement (especially for farmers and ranchers), carefully following all of the rules is critical.  Predetermining a valuation is a big “no-no.” 

IRS Changes Position on Gift Tax Treatment of IDGT Tax Reimbursement Clauses

C.C.A. 202352018 (Nov. 28, 2023) 

An Intentionally Defective Grantor Trust, or IDGT, is a tool used in estate planning to keep assets out of the grantor’s estate at death, while the grantor is responsible for paying income tax on the trust’s earnings.  Those tax payments are not gifts by the grantor to the beneficiaries.  If that tax burden proves to be too much it has been possible to give an independent trustee discretion to distribute funds from the trust to the grantor for making those tax payments.  The IRS said in 2016 that also wouldn’t trigger any gift or income tax consequences for the grantor.  Priv. Ltr. Rul. 201647001 (Aug. 8, 2016).  But now IRS says that a reimbursement clause in an IDGT does trigger gift tax when the trustee distributes trust funds to the grantor.  IRS now deems such a clause to result in a change in the beneficial interests in the trust rather than constituting merely being administrative in nature. 

Note:  While the IRS did not address the issue, it would seem that if state law authorizes the trustee to reimburse the grantor, as long as the trust doesn’t prohibit reimbursement, no gift tax should be triggered.  

“Takings” Cases at the U.S. Supreme Court

Devillier v. Texas, 144 S. Ct. 938 (2024) 

Sheetz v. El Dorado County, 144 S. Ct. 893 (2024) 

Devillier – Is the Fifth Amendment “self-executing”?  The family involved in Devillier has farmed the same land for a century.  There was no problem with flooding until the State renovated a highway and changed the surface water drainage.  In essence, the renovation turned the highway into a dam and when tropical storms occurred, the water no longer drained into the Gulf of Mexico.  Instead, the farm was left flooded for days, destroying crops and killing cattle.  The family sued the State of Texas to get paid for the Taking.

Note:  Constitutional rights don’t usually come with a built-in cause of action that allows for private enforcement in courts – in other words, “self-executing.”  They’re generally invoked defensively under some other source of law or offensively under an independent cause of action. 

The family claimed that the Takings Clause is an exception based on its express language – “nor shall private property be taken for public use, without just compensation.”  The case was removed to federal court and the family won at the trial court.  However, the appellate court dismissed the case on the basis that the Congress hadn’t passed a law saying a private citizen could sue the state for a constitutional taking.  In other words, the federal appellate court determined that the Fifth Amendment’s Takings Clause isn’t “self-executing.” 

The U.S. Supreme Court agreed to hear the case with the question being what the procedural vehicle is that a property owner uses to vindicate their right to compensation against a state.  The U.S. Supreme Court unanimously reversed the lower court, although it did not hold that the Fifth Amendment is “self-executing.”  Texas does provide an inverse condemnation cause of action under state law to recover lost value by a Taking. The Supreme Court noted that Texas had assured the Court that it would not oppose the complaint being amended so that the case could be pursued in federal court based on Texas state law. 

Sheetz - traffic impact mitigation fee and government extortion.  Sheetz claimed that a local ordinance requiring all similarly situated developers pay a traffic impact mitigation fee posed the same threat of government extortion as those struck down in Nollan v. California Coastal Commission, 483 U.S. 825 (1987), Dolan v. City of Tigard, 512 U.S. 374 (1995), and Koontz v. St. Johns River Water Management District, 570 U.S. 595 (2013). Those cases, taken together, hold that if the government requires a landowner to give up property in exchange for a land-use permit, the government must show that the condition is closely related and roughly proportional to the effects of the proposed land use. 

In this case, Sheetz claimed that test meant that the county had to make a case-by-case determination that the $24,000 fee was necessary to offset the impact of congestion attributable to his building project - a manufactured home on a lot that he owns in California.  He paid the fee, but then filed suit to challenge its constitutionality under the Fifth Amendment.   The U.S. Supreme Court unanimously ruled in his favor.  The Court determined that nothing in the Takings Clause indicates that it doesn’t apply to fees imposed by state legislatures. 

May 6, 2024 in Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, April 30, 2024

Summer Seminars – Branson and Jackson Hole

Registration for both of the national summer seminars that Paul Neiffer and I will be doing is now open.  The Branson (College of the Ozarks) seminar is in-person only, but the Jackson Hole event is offered both in-person and online.  For those attending the Jackson Hole seminar in-person, a room block is established at the Virginian Resort at a reduced rate.

The topics that we will cover are the same at both locations (although the material for Jackson Hole will be updated and current through mid-July).

Here’s a list of the topics we will be covering:

  • Federal Tax Update
  • Farm Bill Update
  • Beneficial Ownership Information (BOI) Reporting
  • Depreciation Planning
  • Tax Planning Considering the Possible Sunset of TCJA
  • How Famers Might Benefit from the Clean Fuel Production Tax Credit
  • Conservation Easements
  • Federal Estate and Gift Tax Update
  • SECURE Act 2.0
  • Split Interest Land Transactions
  • Manager-Managed LLCs
  • Types of Trusts
  • Monetized Installment Sales
  • Charitable Remainder Trusts or Cash Balance Plans
  • Special Use Valuation
  • Buy-Sell Agreements (planning in light of the Connelly decision)


For more information about the Branson event, and registration, click here:

For more information about the Jackson Hole event, and registration, click here:

April 30, 2024 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, April 22, 2024

Branson Summer Seminar on Farm Income Tax and Estate/Business Planning


On June 12-13, I will be conducting a farm income tax and farm estate and business planning seminar at the Keeter Center on the campus of College of the Ozarks near Branson, MO.  This is a live, in-person presentation only.  No online option is available.  My partner in presentation is Paul Neiffer.  Paul and I have done these summer events for a number of years and are teaming up again this summer to provide you with high quality training on the tax issues you deal with for your farm and ranch clients.


Here’s a list of the topics that Paul and I will be digging into:

  • Federal Tax Update
  • Farm Bill Update
  • Beneficial Ownership Information (BOI) Reporting
  • Depreciation Planning
  • Tax Planning Considering the Possible Sunset of TCJA
  • How Famers Might Benefit from the Clean Fuel Production Tax Credit
  • Conservation Easements
  • Federal Estate and Gift Tax Update
  • SECURE Act 2.0
  • Split Interest Land Transactions
  • Manager-Managed LLCs
  • Types of Trusts
  • Monetized Installment Sales
  • Charitable Remainder Trusts or Cash Balance Plans
  • Special Use Valuation
  • Buy-Sell Agreements (planning in light of the Connelly decision)


The link for registration is below and can be found on my website – and the seminar is sponsored by McEowen, P.L.C.  You may mail a check with your registration or register and pay at the door.  Early registration is eligible for a lower rate.  Certification is pending with the National Association of State Boards of Accountancy (NASBA) to qualify for 16 hours of CPE credit and corresponding CLE credit (for attorneys). 

Here is the specific link for the event:

Jackson Hole

Paul and I will present the same (but updated) seminar in Jackson Hole, Wyoming, on August 5 and 6.  That event will also be broadcasted live online.

We hope to see you there!

April 22, 2024 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, April 7, 2024

Family Settlement Agreement for Farm Family Not Done Properly


A family settlement agreement is one possible method of resolving conflicts among family members concerning assets and finances, among other issues.  Done properly, a family settlement agreement can outline duties and responsibilities of family members and minimize or eliminate future family disputes.  It is also a legally binding and enforceable contract.  But, before a family settlement agreement is entered into, the family must carefully consider the purpose and scope of the agreement.  The problems that need to be addressed should lead to provisions drafted into the agreement designed to resolve those problems. 

A recent case from Iowa illustrates how not to go about executing a family settlement agreement – it’s the topic of today’s post.

Facts of the Case

In In re Estate of Schultz, No. 22-1671, 2024 Iowa App. LEXIS 217 (Iowa Ct. App. Mar. 6, 2024),   the decedent and her husband were longtime farmers.  He died in 2001 and the decedent died in 2019.  They divided the farmland between them equally in value and executed mirror-image wills in 1998, that left the surviving spouse a life estate in the deceased spouse’s half of the farm property with the remainder interest passing equally to their four children upon the surviving spouse’s death. 

Note:  At the time the wills were prepared in 1998, the total value of the couple’s farmland was approximately $11 million.  For deaths in 1998, the federal estate tax applicable exclusion was $625,000 with a top rate of 55 percent.  Accordingly, the marital deduction wills with the credit shelter and life estate portions in each will was the proper approach from a federal estate tax minimization standpoint at the time.

The couple’s only son farmed with his father and on his own after his father’s death.  In 2003, the son accompanied his mother to see her attorney.  She changed her will to divide her farmland into specific farms and distributed them among her four children:  four farms totaling 420 acres to the son; three farms totaling 151 acres to the three daughters to share equally; and one farm of 230 acres to be divided equally between all of the children along with her other property.  The 2003 will named the son and one daughter as executors of the estate, but only the son was aware of the 2003 amended will.  In addition, the decedent named the son and a different daughter as agents under a power of attorney.  While the daughter named as agent under the power was not told of the designation, the son told another sister that she no longer needed to help their mother with her finances and bills.  At about the same time, the decedent entered into a 16-year farm lease with the son with rent set at $70 per acre. 

The sisters discovered the existence of the amended will in 2014 and all of the children and their mother met with an attorney to have the 1998 will restored.  The attorney, after meeting with the mother privately, determined that she lacked testamentary capacity to change the 2003 will and suggested a family settlement agreement as an alternative.  The mother and the four children entered into a family settlement agreement that divided all of the mother’s property equally among them upon her death.  The decedent did not sign the agreement and two of the four siblings died before their mother (including the son).  Upon the decedent’s death, a surviving daughter (as executor) sought to probate the decedent’s will.  The attorney for the estate filed the family settlement agreement with the court the same day.  After the 16-year lease expired, the executor also began renting 607 acres of farmland for $100 per acre for three years.  She signed the lease as both tenant and landlord with her husband and son also signing as tenants.   

Trial Court Decision

The probate (trial) court admitted the will and family settlement agreement and the daughter distributed the decedent’s estate according to the terms of the family settlement agreement.  The trial court determined that the Family Settlement Agreement was valid and distributed the decedent’s estate in accordance with that agreement (25 percent to a surviving sister; 25 percent to the sister serving as executor; 12.5 percent each to two children of a predeceased sister; and 8.33 percent to the three children of the pre-deceased brother. The trial court also found that the decedent only changed her will in 2003 because of the son’s improper influence. 

The children of the predeceased brother objected, claiming that the family settlement agreement was invalid, and that the daughter improperly accounted for estate assets and had engaged in self-dealing.  The trial court determined that the executor had not engaged in self-dealing and directed the executor to either “amend” or “clarify” the accounting issue.

Appellate Court Has Different Views

On appeal, the appellate court reversed on the issue of the validity of the family settlement agreement.  The appellate court found that the family settlement agreement was not valid. The parties’ interests had not yet vested because the mother was still living at the time and two of her children predeceased her, and their children were not party to the family settlement agreement – a requirement of state law.  Iowa Code §633.273(1).  The siblings’ expectancy interest passed to their children, but they hadn’t signed the family settlement agreement at the time it was admitted to probate.  The appellate court remanded with directions for the trial court to hold further proceedings on the validity of the decedent’s 2003 will. 

The appellate court also determined that the accounting issue was not properly before the court.  However, the appellate court affirmed the trial court’s finding that the daughter that served as executor had not engaged in self-dealing.  The rental amount was appropriate, and improvements made on the farmland were legitimate.  The appellate court noted that state law requires court approval for self-dealing transactions (Iowa Code §633,155), but that the trial court retroactively approved the rental agreement and paying labor costs for the improvements.  


There were various problems with this entire situation.  The family was essentially trying to treat the family settlement agreement as a testamentary device.  Without the mother’s signature and satisfaction of the formalities for a will, that won’t work.  Also, state law was not followed in all respects to make the agreement valid.  The accounting and self-dealing issues were the result of sloppiness by the executor and, perhaps, the attorney for the estate. 

There’s a right way and a wrong way to do a family settlement agreement.  This case grades over into the wrong way.

April 7, 2024 in Estate Planning | Permalink | Comments (0)

Friday, January 5, 2024

2023 in Review – Ag Law and Tax Developments (Part 2)


Today’s article is the second in a series discussing the top developments in agricultural law and taxation during 2023.  As I work my way through the series, I will end up with the top ten developments from last year.  But I am not there yet.  There still some significant developments to discuss that didn’t make the top ten list.

Significant developments in ag law and tax during 2023, but not quite the top ten – it’s the topic of today’s post.

Scope of the Dealer Trust

In re McClain Feed Yard, Inc., et al., Nos., 23-20084; 23-20885; 23-20886 (Bankr. N.D. Tex. 2023)

The Packers and Stockyards Act of 1921 (PSA) (7 U.S.C. §§ 181 et seq.), applies to transactions in livestock or poultry in interstate commerce involving a covered a packer, dealer, market agency, swine contractor, or live poultry dealer.  The PSA creates statutory trusts and requires bonds of market participants which may provide funds to reduce losses incurred by unpaid cash sellers of livestock or poultry.  A similar provision applies for perishable commodities created by the Perishable Agricultural Commodity Act. 7 U.S.C. § 499e(c).

Historically, there have been numerous attempts to amend the PSA to create a “Dealer Trust” that would establish a statutory trust similar to the Packer Trust created by the PSA at 7 U.S.C. § 196. These efforts succeeded with legislation signed into law on December 27, 2020, that adds new Section 318 to the PSA.  Codified at 7 U.S.C. § 217b.

The Dealer Trust’s purpose is to protect unpaid cash sellers of livestock from the bankruptcy of feeders, brokers and small processors.  The new law puts unpaid cash sellers of livestock ahead of prior perfected security interest holders.  It’s a provision like the trust that exists for unpaid cash sellers of grain to a covered grain buyer.  The first case testing the scope of the Dealer Trust Act is winding its way through the courts.

A case involving the new Dealer Trust Act hit the courts in 2023.  Over 100 livestock producers have $122 million in unpaid claims against three defunct cattle operations, and a lender says one of the feedyards sold about 78,000 cattle and didn’t pay on the loans.  The problems stem from a $175 million Ponzi and check-kiting scheme that the debtors were engaged in.

One issue is what the trust contains for the unpaid livestock sellers.  Is it all assets of the debtors?  It could be – for feedyards and cattle operations, practically all the income is from cattle sales.  So far, USDA has approved for payment only $2.69 million of claims for cash sellers of livestock, claiming that the balance is owed to non-cash sellers not covered by the law. 

The law is new, so it’s not clear yet what is a trust asset for the benefit of the cash livestock sellers, and what assets, if any, are in the debtors’ bankruptcy estates.  We should learn the answer to those questions in 2024. 

Equity Theft

Tyler v. Hennepin County, 598 U.S. 631 (2023)

Equity that a homeowner has in their home/farm is the difference between the value of the home or farm and the remaining mortgage balance.  It’s a primary source of wealth for many owners.  Indeed, the largest asset value for a farm or ranch family is in the equity wrapped up in the land.  In the non-farm sector, primary residences account for 26 percent of the average household’s assets.  Certainly, the government has the constitutional power to tax property and seize property to pay delinquent taxes on that property.  But is it constitutional for the government to retain the proceeds of the sale of forfeited property after the tax debt has been paid?  That was a question presented to the U.S. Supreme Court in 2023.

In this case, Hennepin County. Minnesota followed the statutory forfeiture procedure, and the homeowner didn’t redeem her condominium within the allotted timeframe.  The state ultimately sold the property and bagged the proceeds – including the homeowner’s equity in the property.    

She sued, claiming that the county violated the Constitution’s Takings Clause (federal and state) by failing to remit the equity she had in her home.  She also claimed that the county’s actions amounted to an unconstitutional excessive fine, violated her due process and constituted an unjust enrichment under state law.  The trial court dismissed the case and the Eighth Circuit affirmed finding that she lacked any recognizable property interest in the surplus equity in her home.  On further review, the U.S. Supreme Court unanimously reversed.  The Court held that an unconstitutional taking had occurred. 

All states have similar forfeiture procedures, but only about a dozen allow the state to keep any equity that the owner has built up over time.  Now, those states will have to revise their statutory

forfeiture procedures.

Customer Loyalty Rewards

Hyatt Hotels Corporation & Subsidiaries v. Comr., T.C. Memo. 2023-122

Many companies, including agribusiness retailers, utilize customer loyalty programs as a means of attracting and keeping customers.  Under the typical program, each time a customer or “member” buys a product or service, the customer earns “reward points.”  The reward points accumulate and are computed as a percentage of the customer’s purchases.  When accumulated points reach a designated threshold, they can then be used to buy an item from the retailer or can be used as a discount on a subsequent purchase (e.g., cents per gallon of off a fuel purchase).  Some programs make be structured such that a reward card is given to the customer after purchases have reached the threshold amount.  The reward card typically has no cash value and expires within a year of being issued.  A “loyalty rewards” program is a cost to the retailer and a benefit to the customer, triggering tax issues for both. 

In Hyatt, the petitioner established a “Gold Passport” rewards program in 1987 that provided its customers with reward points redeemable for free future stays at its hotels (the petitioner own about 25 percent of its branded hotels with the balance owned by third parties who license the petitioner’s IP and/or management services).   Under the program, the petitioner required hotel owners to make payments into an operating fund (Fund) when a customer earned “points.”  The petitioner was the custodian of the Fund and compensated a hotel owner out of the Fund when a guest redeemed reward points for free stays.  The petitioner determined the rate of compensation. The petitioner invested portions of the Fund's unused balance in marketable securities which generated gains and interest.  In 2011, the petitioner changed the compensation formula to increase the amount it could hold for investment.  The petitioner also used the Fund to pay administrative and advertising expenses that it determined were related to the rewards program. 

The points could not be redeemed for cash and were not transferrable.  In addition, any particular member hotel could not get the payments to the Fund back except by providing free stays to members.  The Fund allocated from 46-61 percent to reward point redemptions.  Fund statements described the funds as belonging to the hotel owners that paid into the Fund.  The petitioner’s Form 10-K filed with the SEC treated the Fund as a “variable interest entity” eligible for consolidated reporting.  When the petitioner provided management services to member hotels, payments into the Fund were reported as “expenses.” 

The petitioner did not report the Fund’s revenue into gross income with respect to the hotels it did not own and did not claim any deductions for expenses paid on the basis that petitioner was a mere trustee, agent or conduit for hotel owners rather than a true owner of the Fund.  But, the petitioner did claim deductions for its share of program expenses associated with the 25 percent of hotels that it owned.  The petitioner reported Fund assets and liabilities on a consolidated basis on Schedule L.  The petitioner’s Form 1120 did not state that it was using the trading stamp method or include any statement concerning Treas. Reg. §1.451-4.  The petitioner’s position was that third-party owners should make their own decision about tax treatment of the money they paid to the Fund.  

The IRS audited and took the position that the petitioner was using an improper accounting method which triggered an I.R.C. §481 adjustment requiring the including in the petitioner’s income the cumulative amounts from 1987 (Fund revenue less expenditures).  The IRS asserted an adjustment of $222.5 million and additional adjustments in 2010 and 2011.  The petitioner disagreed and filed a Tax Court petition. 

The Tax Court determined that the amounts the petitioner received related to the customer reward program (i.e., Fund revenue) were revenue includible in gross income because of the petitioner’s significant control over the Fund.  That control indicated that the petitioner had retained a beneficial interest in the Fund, and the exception under the “trust fund” doctrine established in Seven-Up Co. v. Comr., 14 T.C. 965 (1950), acq., 1950-2 C.B. 4, did not apply. 

Hyatt lays down a good “marker” for tax advisers with clients that offer loyalty reward programs to customers. Retail businesses that offer such programs will want to ensure that their program is structured in a manner that can fit within the trust fund doctrine’s exception for excluding program funds from gross income.

Basis of Assets Contained in an Intentionally Defective Grantor Trust (IDGT)

Rev. Rul. 2023-2, 2023-16 I.R.B. 658

An IDGT is an irrevocable trust that is designed to avoid any retained interests or powers in the grantor that would result in the inclusion of the trust’s assets in the grantor’s gross estate upon the grantor’s death. Normally, an irrevocable trust is a tax entity distinct from the grantor and has its own income and deductions (net of distributions paid to beneficiaries) reported on its own income tax return. But there is language included in an IDGT that causes the income to be taxed to the grantor.  So, a separate return need not be prepared for the trust, but you still get the trust assets excluded from the grantor’s estate at death.  It also allows the grantor to move more asset value to the beneficiaries because the grantor is paying the tax.

Note:  The term “intentionally defective grantor trust” refers to the language in the trust that cause the trust to be defective for income tax purposes (the trust grantor is treated as the owner of the trust for income tax purposes) but still be effective for estate tax purposes (the trust assets are not included in the grantor’s gross estate). 

This structure allows the IDGT’s income and appreciation to accumulate inside the trust free of gift tax and free of generation-skipping transfer tax, and the trust property is not in the decedent’s estate at death.  This will be an even bigger deal is the federal estate tax exemption is reduced in the future from its present level of $13.61 million.  Another benefit of an IDGT is that it allows the value of assets in the trust to be “frozen.” 

A question has been whether the assets in an IDGT receive a stepped-up basis (to fair market value) when the IDGT grantor dies.  Over the years, the IRS has flip-flopped on the issue but in 2023 the IRS issued a Revenue Ruling taking the formal position that the trust assets do not get a stepped-up basis at death under I.R.C. §1014 because the trust assets, upon the grantor’s death, were not acquired or passed from a decedent as defined in I.R.C. §1014(b).  So, the basis of the trust assets in the hands of the beneficiaries will be the same as the basis in the hands of the grantor. 

Not getting a stepped-up basis at death for the assets in an IDGT is an important consideration for those with large estates looking for a mechanism to keep assets in the family over multiple generations at least tax cost.  An irrevocable trust may still be appropriate for various reasons such as asset protection and overall estate tax planning.  But, the IRS ruling does point out that it’s important to understand all of the potential consequences of various estate planning options.

January 5, 2024 in Estate Planning, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)

Tuesday, January 2, 2024

2023 in Review – Ag Law and Tax


As 2024 begins, it’s good to look back at the most important developments in agricultural law and tax from 2023.  Looking at things in retrospect provides a reminder of the issues that were in the courts last year as well as the positions that the IRS was taking that could impact your farming/ranching operation.  Over the next couple of weeks, I’ll be working my way through the biggest developments of last year, eventually ending up with what I view as the Top Ten developments in ag law and tax last year.

The start of the review of the most important ag law and tax developments of 2023 – it’s the topic of today’s post.

Labor Disputes in Agriculture

Glacier Northwest, Inc. v. International Brotherhood of Teamsters Local Union No. 174, 143 S. Ct. 1404 (2023)

In 2023, the U.S. Supreme Court ruled that an employer can sidestep federal administrative agency procedures of the National Labor Relations Board 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 filed a lawsuit for damages against the labor union representing its drivers.  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 first. 

The 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. 

There’s an important ag angle to the Court’s decision.  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.


Foster v. United States Department of Agriculture, 68 F. 4th 372 (8th Cir. 2023)

Another 2023 development involved the application of the Swampbuster rules on a South Dakota farm.  In 1936, the farmer’s father planted a tree belt to prevent erosion. The tree belt grew over the years and collects deep snow drifts in the winter. As the weather warms, the melting snow collects in a low spot in the middle of a field before soaking into the ground or evaporating.  In 2011, the USDA called the puddle a wetland subject to the Swampbuster rules that couldn’t be farmed, and it refused to reconsider its determination even though it had a legal obligation to do so when the farmer presented new evidence countering the USDA’s position.

The farmer challenged the determination in court as well as the USDA’s unwillingness to reconsider but lost.  This seems incorrect and what’s involved is statutory language on appeal rights under the Swampbuster program. The Constitution limits what the government can regulate, including water that doesn’t drain anywhere.  In addition, the U.S. Supreme Court has said the government cannot force people to waive a constitutional right as a condition of getting federal benefits such as federal farm program payments. 

We’ll have to wait and see whether the Supreme Court will hear the case.


Behrens v. United States, 59 F. 4th 1339 (Fed. Cir. 2023)

Abandoned rail lines that are converted to recreational trails have been controversial.  There are issues with trespassers accessing adjacent farmland and fence maintenance and trash cleanup.  But perhaps a bigger issue involves property rights when a line is abandoned. A federal court opinion in 2023 provided some guidance on that issue. 

In 2023, a federal court clarified that a Fifth Amendment taking occurs in Rail-to-Trail cases when the trail is considered outside the scope of the original railway easement. That determination requires an interpretation of the deed to the railroad and state law.  Under the Missouri statute involved in the case the court said the railroad grant only allowed the railroad to construct, maintain and accommodate the line.  Once the easement was no longer used for railroad purposes, the easement ceased to exist.  Trail use was not a railroad purpose. The removal of rail ties and tracks showed there would be no realistic railroad use of the easement and trail use was unrelated to the operation of a railway.

The government’s claim that the trail would be used to save the easement and that the railway might function in the future was rejected, and the court ruled that the grant was not designed to last longer than current or planned railroad operation.  As a result, a taking had occurred. 

CAFO Rules

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

In 2023, USDA’s 2016 rule exempting medium-sized CAFOs from environmental review for FSA loans was invalidated.  A medium-sized CAFO can house up to 700 dairy cows, 2,500 55-pound hogs or up to 125,000 chickens.  The rule was challenged as being implemented improperly without considering the impact on the environment in general.  The USDA claimed that it didn’t need to make any analysis because its proposed action would not individually or cumulatively have a significant effect on the human environment.  So, the agency categorically exempted medium-sized CAFOs from environmental review.  

But the court disagreed with the USDA and vacated the rule.  The FSA conceded that it made no finding as to environmental impact.  The court determined that to be fatal, along with providing no public notice that it was going to categorically exempt all loan actions to medium-sized CAFOs. 

Don’t expect this issue to be over.  In 2024, it’s likely that the agency will try again to exempt medium-sized CAFOs from environmental review for FSA loan purposes.

Charitable Remainder Annuity Trust Abuse

Gerhardt v. Comr., 160 T.C. No. 9 (2023)

In 2023, the U.S. Tax Court decided another case involving fraud with respect to a charitable remainder annuity trust.  It can be a useful tax planning tool, particularly for the last harvest of a farmer that is retiring.  But a group centered in Missouri caught the attention of the criminal side of IRS. 

The fact of the case showed that farmers contributed farmland, harvested crops, a hog-finishing barn and hog equipment to Charitable Remainder Annuity Trusts.  The basic idea of a CRAT is that once property is transferred to the trust the donor claims a charitable deduction for the amount contributed with the income from the CRAT’s annuity spread over several years at anticipated lower tax brackets.  But contributing raised grain to a CRAT means you can’t claim a charitable deduction because you don’t have any income tax basis in the grain.  In addition, there are ordering rules that govern the annuity stream coming back to the donor.  Ordinary income is taxed first – which resulted from the contribution of the crops and depreciation recapture on the hog-finishing barn and equipment.  

The farmers involved got into the CRATs by reading an ad in a farm magazine.  The Department of Justice prosecuted the promoters that dished out the bad advice. 

Get good tax advice if you consider using a CRAT.  They can be a good tax planning tool but can create a mess if the rules aren’t followed.


This is the first pass at some of the biggest developments in ag law and tax during 2023.  In my next post, I’ll continue the journey.

January 2, 2024 in Environmental Law, Estate Planning, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)

Monday, December 11, 2023

Probate Fees - How Much are They?


One of the reasons that people give for transferring property to a revocable trust during life is to avoid probate at death.  That can be accomplished if all of the decedent’s property has been transferred to the trust before death.  To make sure that occurs, the trust is often accompanied with a pour-over will.  The property that hasn’t been retitled into the name of the trustee of the trust is “poured over” into the trust at death. 

But just how much are probate fees?  How are they determined?  That’s the topic of today’s post.

Establishing Probate Fees

The avoidance of probate is often tied to the desire to avoid probate fees and maintain privacy.  As for fees, how much can be anticipated?  The answer depends.  The more complex the estate, and/or the more issues that come up post-death, the estate can anticipate incurring more probate fees.  The converse is also true.  In some states, a flat percentage of the gross estate value can be charged as an attorney fee for the estate.  That can range anywhere from about 1.5 percent to 6 percent or even higher. 

Kansas probate fees.  In Kansas, state law specifies that, “every fiduciary shall be allowed his or her necessary expenses incurred in the execution of his or her trust and shall have such compensation for services and those of his or her attorneys as shall be just and reasonable.” Kan. Stat. Ann. §59-1717.  There is no statute in Kansas that allows for a percentage fee for handling a decedent’s estate.  It’s not specifically disallowed if the percentage amount is backed up with itemized time sheets and is ultimately deemed reasonable by the probate court.  In essence, then, probate fees are based on an hourly rate for the amount of hours reasonably spent working on the estate.  In addition, an attorney’s fee for handling a decedent’s estate is also based on the eight factors of the Kansas Rules of Professional Conduct (KRPC).  The probate court considers these eight factors when determining whether a fee is appropriate. 

The eight factors are:

  • The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
  • The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
  • The fee customarily charged in the locality for similar legal services;
  • The amount involved and the results obtained;
  • The time limitations imposed by the client or by the circumstances;
  • The nature and length of the professional relationship with the client;
  • The experience, reputation, and ability of the lawyer or lawyers performing the services; and
  • Whether the fee is fixed or contingent. KRPC 1.5(a)

Kansas case.  A recent Kansas county district court decision involved the application of the factors.  In In re Estate of Appleby, No. CQ-2023-CV-000008 (Chautauqua Co. Dist. Ct., Nov. 9, 2023), from 2014 until death in 2021, the decedent had been the subject of a conservatorship.  The person that would become the executor of the decedent’s estate was the conservator.   The attorney that represented the executor for the decedent’s eventual estate, represented the conservator during the conservatorship.  The annual billing statements submitted to the conservator for the legal work in the conservatorship were itemized and detailed. The itemized billing statements listed each date services were performed; a description of the services performed on each date; the amount of time worked on each date; the amount charged for the services performed on each date; the total amount of time worked during the billing period; and the total amount charged for work performed during the billing period.  The conservator reviewed the statements, the court approved them and the conservator paid. 

However, for estate administration work, the attorney did not provide the executor with a written representation agreement and did not communicate the basis or rate of the fee he intended to charge the estate.  The executor believed the attorney would bill his time hourly, just as he had done for the previous seven years in the conservatorship matter.

The decedent died on July 6, 2021, with a gross estate value of $4,570,521.11.  However, the attorney only first informed the executor on May 2, 2022, that a fee of three percent of the estate’s gross value would be charged.  The executor informed the attorney that the fee should be based on an hourly rate.  The attorney replied as follows:

“I feel comfortable asking for a fee based upon 3%. If you want to oppose it, that's fine. Please remember that our… service to her predates your appointment as her conservator.  [We]…did quite a bit of "off the books" work for [the decedent] during her lifetime, … and… it would all even out when we handled the estate. Honestly, that's a common approach taken by attorneys ·when they know they'll be handling an estate at a later date. So, I don't know what I can say. I respect your views and your being upfront with me, but I know what the common practice has been and what we've always done.”

Ultimately, on May 30, 2023, the attorney generated a billing statement. The billing statement included descriptions of the work performed between the date of the decedent’s death and May 2023, but the descriptions were not tied to specific dates and did not include the amount of time spent performing any task on any date.  The May 30 billing statement concludes with the application of a 3% fee to the $4,570,521.11 value of the estate assets for a total fee of $137,115.63.  The local magistrate judge awarded the fee on June 5, 2023, and the executor appealed.

On appeal, the attorney estimated that he spent between 420 and 560 hours on the estate at a rate of $240 per hour.  Only specific tasks, based on the review of the emails, amounted to 174-242 hours.  The court then applied the eight factors of Rule 1.5(a) of the KRPC to the facts of the case.  The court noted that the attorney didn’t keep time records, even though being on notice that the executor wanted to know the amount of time that was being billed.  No time records kept.  There was also no engagement letter that had been entered into with the client.  The work on the estate, the court noted, did not involve difficult issues and a paralegal performed much of the work.  The fact that the attorney had billed on a percentage basis for 40 years was severely mitigated by subsequent caselaw specifying that, “"fees which are not supported by meticulous, contemporaneous time records that show the specific tasks being billed should not be allowed."  See, e.g., In re Estate of Trembley, 220 P.3d 1114 (Kan. Ct. App. 2009).  The court also noted that the attorney had a previous 7-year relationship with executor as conservator and billed hourly for the work on the conservatorship. 

Ultimately, the court approved what it deemed to be a reasonable fee of fee of $58,080 (down from the $137,115.63 requested).  In percentage terms, the approved fee worked out to be slightly less than 1.3 percent of the estate value.  

In reaching its decision, the court noted that approving attorney fees for work on an estate is a fact-based determination.  The fees must be supported by contemporaneous time records.  If they aren’t, an “award of…fees based on a percentage of an estate is not reasonable, regardless of the local custom.” 

Note:  The court also pointed out that the attorney involved “serves on the Kansas Board of Discipline for Attorneys.”


The fear of large and outrageous attorney fees for handling estates in Kansas is largely not justified.  The courts operate as an effective “brake” on attorneys trying to charge unjustified fees – at least that’s been the case in Kansas since 2009.  But, that may not be true in other states.  So, for those wanting to avoid probate fees, a revocable trust (or some other type of trust) might be an appropriate estate planning tool.  But, it’s important to understand just how attorney fees in probate are established.  One wonders how many estates in Kansas have been unjustly overbilled since 2009 by the attorney involved in the case.  All it took was one well-informed executor to get the right result.

December 11, 2023 in Estate Planning | Permalink | Comments (0)

Saturday, December 9, 2023

The Importance of Proper Asset Titling


For many farmers and ranchers, the land is the most significant asset that is owned, at least in terms of value.  Land value often predominates in a farmer or rancher’s estate.  How the land is titled is important.  Holding title in the proper form facilitates estate planning in accordance with expressed goals and can ease the tax burden upon death or upon subsequent transfer of the property by the heir or heirs.  Conversely, failing to title property appropriately can undermine estate planning expectations, create family disharmony and result in a higher tax burden.

The distinction between co-tenancy and joint tenancy and why it matters – it’s the topic of today’s post.


A tenant in common holds an undivided interest in property that does not terminate upon the tenant predeceasing surviving co-tenants.  Upon the death of a tenant in common, that person’s interest passes under that person’s will (or in accordance with state law if there is no will (or trust)) to heirs of the deceased cotenant.  For federal estate and state inheritance/estate tax purposes, only the portion of the property owned by the deceased tenant in common is included in the decedent’s gross estate at death and receives a fair-market basis at death.

Joint Tenancy

The distinguishing characteristic of joint tenancy is the right of survivorship, with the surviving joint tenant or tenants taking all upon the death of a fellow joint tenant regardless of the terms of the deceased joint tenant’s will.  In other words, when a joint tenant dies, the deceased joint tenant’s share in the property passes to the surviving joint tenant (or surviving joint tenants).  It does not pass to the heir of the deceased joint tenant (tenants).  Upon the death of the last of the joint tenants to die, the joint tenancy is extinguished.    

In addition, upon a conveyance of real property, transfer to two or more persons generally creates a tenancy in common unless it is clear in the deed or other conveyancing document that a joint tenancy is intended.  A joint tenancy is created by specific language in the conveyancing instrument.  That specific language, often referred to as “magic words of conveyance,” clearly denotes the survivorship feature of a joint tenancy.  In addition, unless the conveyancing instrument is clear in its intent to create a joint tenancy, the legal presumption is against joint tenancy and that a tenancy-in-common was created.  For example, assume that O conveys Blackacre to “A and B, husband and wife.”  The result of that language is that A and B own Blackacre as tenants in common.  To own Blackacre as joint tenants O needed to convey Blackacre as required by state law to create a joint tenancy.  The language for creating a joint tenancy is typically to “A and B as joint tenants with rights of survivorship” or to “A and B as joint tenants with right of survivorship and not as tenants in common.”

Except for husband-wife joint tenancies, the survivorship feature may generate an unacceptable property disposition pattern upon death.  However, on the death of the first of the joint tenants to die, probate may be simplified or eliminated with title obtained by the surviving joint tenant perfected by showing non-liability for taxes and by proving the death of the decedent by affidavit or death certificate.  This is possible in most (but not all) states.

When it cannot be determined that two (or more) joint tenants have died other than at the same time an interesting problem may arise.  Most states have enacted a simultaneous death statute to handle just such a situation.  Such statutes typically provide that the jointly held property is to be divided into as many equal shares as there were joint tenants and that the share allocable to each joint tenant is to be distributed as if such joint tenant had survived all of the other joint tenants.

A major estate planning limitation of the joint tenancy form of property ownership is that the survivorship right of joint tenancy precludes the use of the life estate-remainder arrangement for the nonmarital portion of the estate to reduce the death tax burden upon the survivor’s death.  The entire property, therefore, will pass to the survivor and may be taxed again in the survivor’s estate.  In addition, another problem with joint tenancy is that each joint tenant has a right to sever the joint tenancy relationship unilaterally (except for tenancies by the entirety).  As a result, a joint tenant furnishing consideration for acquisition of the property in effect grants to the other tenant a revocable interest that could be partitioned and severed at any time.  Consequently, each co-owner has the power to amend or destroy the other’s estate plan.

For marital joint tenancies, upon the death of the first spouse, one-half of the date-of-death value of the jointly held property is included in the first-spouse’s estate.  However, the full value of the jointly held property is included in the first spouse’s estate (and receives a date-of-death income tax basis in the hands of the surviving spouse) if the marital joint tenancy was established before 1977 and the spouse that bought the property died after 1981 (Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992)). 

Joint tenancy is not a cure-all for tax planning but, depending upon the circumstances, it may be a convenient means of owning and passing property.  For total estates of each of the husband and wife under $22.8 million (for 2019), there is no federal estate tax liability.  Therefore, joint ownership may serve a useful purpose as a will substitute in the first estate for estates that are not potentially subject to federal estate tax.  However, since it is not known which joint tenant will die first, the estate of the surviving joint tenant will be subject to probate as an intestate estate (where death occurs without a will), unless the survivor prepares a will or otherwise disposes of the property.  For combined spousal estates exceeding $22.8 million (for 2019) in value, joint tenancy ownership may expose a portion of the total estate of the surviving joint tenant to additional taxes, causing an otherwise unnecessary reduction of the estate assets passing to the heirs or other beneficiaries.

Recent Case

A recent case from Texas illustrates the difference between tenancy-in-common and joint tenancy.  It also illustrates how misunderstandings about how property is titled can create family problems.  In Wagenschein v. Ehlinger, 581 S.W.3d 851 (Tex. Ct. App. 2019), a married couple had seven children.  The parents also owned a tract of land.  Upon the last of the parents to die, each child held an undivided one-seventh interest as tenants in common in the tract.  In 1989, the heirs sold the land but executed a deed reserving a royalty interest.  The deed reservation read as follows:  “THERE IS HEREBY RESERVED AND EXCEPTED from this conveyance for Grantors and the survivor of Grantors, a reservation until the survivor's death, of an undivided one-half (1/2) of the royalty interest in all the oil, gas and other minerals that are in and under the property and that may be produced from it. Grantors and Grantors' successors will not participate in the making of any oil, gas and mineral lease covering the property, but will be entitled to one-half (1/2) of any bonus paid for any such lease and one-half (1/2) of any royalty, rental or shut-in gas well royalty paid under any such lease. The reservation contained in this paragraph will continue until the death of the last survivor of the seven (7) individuals referred to as Grantors in this deed.” 

An oil and gas company drilled a producing well in 2010 and began paying royalties to the heirs. As each heir died, the credited their royalty interest to the surviving heirs of each deceased heir.  That had the effect of increasing the respective royalty payments of the surviving heirs.  There were no problems until 2015.  In 2015, a child of a deceased heir sued claiming that the deed crediting the royalty reservation to “Grantors and Grantors’ successors created a “tenancy in common” and not a “joint tenancy”.  If the deed created a tenancy in common, the children of the deceased heirs, rather than the surviving heirs, would inherit their parents’ royalty interests.  The trial court disagreed, noting that while the deed used “successor”, it only did so once and clearly and unambiguously reserved the royalty interest to the heirs and the “survivor[s]” of the heirs, rather than their “successors”, “heirs” or “beneficiaries.”  As such, the trial court concluded that the deed unambiguously created a joint tenancy with the right of survivorship, rather than a tenancy in common that the children of the deceased heirs could inherit.   Thus, as each heir died, their interest in the tract passed to the surviving siblings, not their children.  On appeal, the appellate court affirmed.  Further review was denied.


Properly titling property is important for various reasons – not the least of which is to fulfill expectations on property passage.  In the Texas case, confusion over how property was titled resulted in a family lawsuit.  Regardless of how the case would have been decided, some in the family would not be pleased.   

December 9, 2023 in Estate Planning, Income Tax | Permalink | Comments (0)

Friday, December 1, 2023

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


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.


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

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

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

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

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

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

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

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

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

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

Funding Approaches

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

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

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

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

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

Other Approaches

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

Potential Problem of Life-Insurance Funding

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

Saturday, November 25, 2023

More on Gift Giving


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.


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.

November 25, 2023 in Estate Planning | Permalink | Comments (0)

Monday, November 20, 2023

Ethics and 2024 Summer Seminars!

Tax Ethics

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

For more information you can click here: 

Also, you may register here:

Summer Seminars

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

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

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

Saturday, November 11, 2023

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


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). 


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.”

November 11, 2023 in Estate Planning | Permalink | Comments (0)

Wednesday, November 1, 2023

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


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).


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

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

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

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

Tuesday, October 31, 2023

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

In General

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

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

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

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

Split-Interest Transactions

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

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

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

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

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

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

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

A couple of points can be made about this conclusion:

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

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

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

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

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

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


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

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

Sunday, October 29, 2023

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.


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

October 29, 2023 in Estate Planning, Income Tax, Real Property, Regulatory Law, Secured Transactions | Permalink | Comments (0)

Sunday, August 20, 2023

Farmland Values and Thoughts on Transitioning to the Next Generation


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.  


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.

August 20, 2023 in Estate Planning | Permalink | Comments (0)

Saturday, July 8, 2023

Coeur d’ Alene, Idaho, Conference – Twin Track


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
  • 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.


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. 


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:

Ag Law Track:

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

Sunday, June 18, 2023

Sunday Afternoon Random Thoughts on Ag Law and Tax


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.


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

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

Sunday, June 11, 2023

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


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:  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
  • 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: and here:

Miscellaneous Agricultural Law Topics

Proper Tax Reporting of 4-H/FFA Projects

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

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

The Importance of Checking Beneficiary Designations

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

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

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

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

Liability Release Forms – Do They Work?

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

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

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

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

Equity Theft

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

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

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

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

The Climate, The Congress and Farmers

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

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

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

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

Secure Act 2.0 Errors

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

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

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

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

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

Implications of SCOTUS Union Decision on Farming Businesses

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

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

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

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

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

Digital Grain Contracts

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

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

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

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

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

Thursday, April 20, 2023

Bibliography – First Quarter of 2023

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


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

Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith

Business Planning

Summer Seminars

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

Civil Liabilities

Top Ag Law and Tax Developments of 2022 – Part 1

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

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


Top Ag Law and Developments of 2022 – Part 2

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

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

Environmental Law

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

Top Ag Law and Developments of 2022 – Part 2

Top Ag Law and Developments of 2022 – Part 3

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

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

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

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

Estate Planning

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

Happenings in Agricultural Law and Tax

Summer Seminars

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

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

The Marital Deduction, QTIP Trusts and Coordinated Estate Planning

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

Income Tax

Top Ag Law and Developments of 2022 – Part 3

Top Ag Law and Developments of 2022 – Part 4

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

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

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

Deducting Residual (Excess) Soil Fertility

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

Happenings in Agricultural Law and Tax

Summer Seminars

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

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

Real Property

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

Happenings in Agricultural Law and Tax

Adverse Possession and a “Fence of Convenience”

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

Abandoned Rail Lines – Issues for Abutting Landowners

Regulatory Law

Top Ag Law and Developments of 2022 – Part 2

Top Ag Law and Developments of 2022 – Part 4

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

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

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

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

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

Foreign Ownership of Agricultural Land

Abandoned Rail Lines – Issues for Abutting Landowners

Secured Transactions

Priority Among Competing Security Interests

Water Law

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

Happenings in Agricultural Law and Tax

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