Wednesday, March 25, 2020

Farm and Ranch Estate And Business Planning In 2020 (Through 2025)


The Tax Cuts and Jobs Act (TCJA) has made estate and business planning much easier for most farm and ranch families.  Much easier, that is, with respect to avoiding the federal estate tax.  Indeed, under the TCJA, the exemption equivalent of the unified credit is set at $11.58 million per decedent for deaths in 2020, and with an unlimited marital deduction and the ability to “port” over the unused exclusion (if any) at the death of the first spouse to the surviving spouse, very few estates will incur federal estate tax.   The TCJA also retains the basis “step-up” rule.  That means that property that is included in the decedent’s estate at death for tax purposes gets an income tax basis in the hands of the recipient equal to the property’s fair market value as of the date of death.

But, with the slim chance that federal estate tax will apply, should estate and business planning be ignored?  The answer is “no” if the desire is to keep the farming or ranching business in the family. 

The basic estate planning strategies for 2020 and for the life of the TCJA (presently, through 2025) – that’s the topic of today’s post.

Basic Considerations

Existing plans should focus on avoiding common errors and look to modify outdated language in existing wills and trusts.  For example, many estate plans utilize "formula clause" language.  That language divides assets upon the death of the first spouse (regardless of whether it is the husband or the wife) between a "credit shelter trust," which utilizes the remaining federal estate tax exemption amount, and a "marital trust," which qualifies for the (unlimited) federal estate tax marital deduction.  The intended result of the language is to cause the “credit shelter” trust’s value to be taxed in the first spouse’s estate where it will be covered by the exemption, and create a life estate in the trust property for the surviving spouse that will “bypass” the surviving spouse’s estate upon the surviving spouse’s subsequent death.  As for the martial trust assets, tax on those assets is postponed (if it is taxed at all) until the surviving spouse dies.

It’s also important to have any existing formula clauses in current estate plans reviewed to ensure the language is still appropriate given the increase in the federal exemption amount.  It may be necessary to have an existing will or trust redrafted to account for the change in the law and utilize language that allows for flexibility in planning.   

In addition, for some people, divorce planning/protection is necessary.  Also, a determination will need to be made as to whether asset control is necessary as well as creditor protection.  Likewise, consideration may need to be made of the income tax benefits of family entities to shift income (subject to family partnership rules of I.R.C. §704(e)) and create qualifying deductions for the entity.  The entity may have been created for estate and gift tax discount purposes, but now could provide income tax benefits.  In any event, family entities (such as family limited partnerships (FLPs) and limited liability companies (LLCs)) will continue to be valuable estate planning tools for farmers and ranchers with wealth that is potentially subject to federal estate (and gift) tax.

For the vast majority of family farming and ranching operations, it is not beneficial from a tax standpoint to make gifts during life.  Gifted property provides the donee with a “carryover” income tax basis.  I.R.C. §1015(a).  A partial basis increase can result if the donor pays gift tax on the gift.  I.R.C. §1015(d).   If the property is not gifted, but is retained until death the heirs will receive a income tax basis equal to the date of death value.  I.R.C. §1014.  That means income tax basis planning is far more important than avoiding federal estate tax for most people.  But, some states tax transfers at death with exemptions that are often much lower than the federal exemption.  In those situations, planning to avoid or minimize the impact of state estate/inheritance tax should not be ignored.  Also, consideration should be made to determine whether insurance is still necessary to fund any potential estate tax liability  

Other estate planning points to consider include:

  • For life insurance, it’s probably not a good idea to cancel the policy before having that move professionally evaluated. That’s particularly the case for trust-owned life insurance.  For pension-owned life insurance, for those persons that are safely below the exemption, adverse tax consequences can likely be avoided.
  • Evaluate irrevocable trusts and consider the possibility of “decanting.” Decanting is the process of pouring the assets of one irrevocable trust into another irrevocable trust that contains more desirable terms.  The rules surrounding trust decanting are complex concerning the process of decanting, but it can be a valuable option when unforeseen circumstances arise during trust administration.
  • For durable powers of attorney, examine the document to see whether there are caps on gifted amounts (the annual exclusion is now $15,000) and make sure to not have inflation adjusting references to the annual exclusion.
  • For qualified personal residence trusts (QPRTs) that were created when the estate tax exemption was $2 million, the conventional advice was to deed the house from the QPRT to the children or a remainder trust (which might have been a grantor trust), with a written lease agreement in favor of the parent/donor who would continue to live in the house. Now, it may be desired to have the home included in the estate for basis step-up purposes and the elimination of gain on sale.
  • While FLPs and LLCs may have been created to deal with an estate tax value-inclusion issue, it may not be wise to simply dismantle them because estate tax is no longer a problem for the client. Indeed, it may be a good idea to actually cause inclusion of the FLP interest in the estate.  This can be accomplished by revising the partnership or operating agreement and having a parent document control over the FLP.  Then, an I.R.C. §754 election can be made which can allow the heirs to get a basis step-up.
  • At least through 2025, the choice of entity for the operational side of the farm/ranch business should be reevaluated in light of the 20 percent qualified business income deduction for non-C corporate businesses and the 21 percent income tax rate for C corporations.

Other Planning Issues

While income tax basis planning (using techniques to cause inclusion of asset value in the estate at death) is now of primary importance for most people, asset protection may also be a major concern.  Pre-nuptial agreements have become more common in recent decades, and marital trusts are also used to ultimately pass assets to the heirs of the first spouse to die (who may not be the surviving spouse’s heirs) at the death of the surviving spouse. 

Powers of attorney for both financial and health care remain a crucial part of any estate plan.  For a farm family, the financial power should be in addition to the FSA Form 211, and give the designated agent the authority to deal with any financial-related matter that the principal otherwise could. 

For farms and ranches concerning about the business remaining viable into subsequent generations, the building of a management team is essential.  This involves the development of management skills in the next generation, communication and recognizing various strengths and weaknesses of the persons involved.  It’s also critical to ensure fair compensation for the inputs of labor and/or capital involved and adjust compensation arrangements over time as the changes in the inputs occur.  Also, valuing ownership interests in a closely-held farming/ranching business is important.  This can be largely achieved by a well thought-out and drafted buy-sell agreement as well as a first-option agreement.


While estate planning has been made easier by the TCJA, that doesn’t mean that it is no longer necessary.  Reviewing existing plans with an estate planning professional is important.  Also, the TCJA is only temporary.  The estate and gift tax provisions expire at the end of 2025. When that happens, the exemption reverts to what it was under prior law and then is adjusted for inflation.  If current law is not extended, it is estimated that the federal estate and gift tax exemption will somewhere between $6.5 and $7.5 million.  While those numbers are still high enough to cover the vast majority of people, they are a far cry from the present $11.58 million amount. 

One thing is for sure – a great deal of wealth is going to transfer in the coming decades.  One estimate I have seen is that approximately $30 trillion in asset value will transfer over the next 30-40 years.  That’s about a trillion per year over that timeframe.  A chunk of that will involve farm and ranch real estate, livestock, equipment and other personal property.

These topics will be addressed in detail at the Summer Ag Tax and Ag Estate/Business Conference in Deadwood, South Dakota on July 20-21.  You can learn more about the conference and register here:

March 25, 2020 in Business Planning, Estate Planning | Permalink | Comments (0)

Tuesday, March 17, 2020

Alternate Valuation – Useful Estate Tax Valuation Provision


The dramatic drop in the stock market over the last month has taken its toll on investments intended for use during retirement years.  For example, the Dow Jones peaked at 29,551.42 on February 12, 2020, but had dropped to 20,188.52 at the close on March 16, 2020.  This can cause a difficult tax issue for a decedent’s estate that faces federal estate tax liability by having the potential to trigger a higher than anticipated tax burden.  But, there’s a valuation provision in the tax Code that can be beneficial – alternate valuation of I.R.C. §2032.

The alternate valuation provision for a federally taxable estate – it’s the topic of today’s post.

Valuation Basics

In general, property is valued for federal estate tax purposes as of the date of death.  I.R.C. §2031(a).  Unless an extension is filed, a federal estate tax return is due nine months after the date of the decedent’s death.   However, the executor can make an election to value the estate within six months after death if the value of the property in the gross estate and the estate’s federal estate tax liability (including any generation-skipping transfers payable by reason of the decedent’s death – Treas. Reg. §20.2032-1(b)(1)) are both reduced by making the election.  I.R.C. §2032(c); C.C.A. 201926013 (May 30, 2019).  This is known as an alternate valuation election, and the election causes the estate’s property to be valued at six months after death or earlier if the property is disposed of before the end of the six-month period.  I.R.C. §2032(a).  In other words, property distributed, sold, exchanged or otherwise disposed of within six months of the decedent’s death is valued as of the date of the distribution, sale, exchange or other distribution.  I.R.C. §2032(a)(1); Treas. Reg. §20.2032-1(a)(1).  Any property not so disposed of is valued as of six months after death.  I.R.C. §2032(a)(2).  Post-death value changes due merely to a lapse of time are ignored and the date-of-death value is used.  I.R.C. §2032(a)(3).  If there is no numerically corresponding date six months after the decedent’s death, the alternate valuation date is the last day of the sixth month after death.  Rev. Rul. 74-260, 1974-1 CB 275.  For example, if the date of the decedent’s death was August 31, the correct alternate valuation date would be February 28 (or 29). 

The election doesn’t create a direct issue with filing the federal estate tax return – it’s not due until nine months after the date of death.  The only issue involved might be the shorter timeframe to get the estate assets valued if the election to use the alternate valuation date is made.  Also, if the election is made, it is irrevocable (with a limited exception) and applies to all of the property included in the decedent’s gross estate.  I.R.C. §2032(d)(1); Treas. Reg. §20.2032-1(b)(1).  The election cannot be used as to only a portion of the property in the decedent’s estate.  Id.

Income tax basis issues.  If an alternate valuation election is made, the income tax basis of property that is acquired from the decedent is its value as of the applicable valuation date under the alternate valuation rules.  I.R.C. §1014(a)(2); Treas. Reg. §1.1014-3(e).  The adjusted basis of the property is the value as of the alternate valuation date, less any depreciation allowed or allowable from the time of the decedent’s death.  Rev. Rul. 63-223, 1963-2 CB 100.  If the estate extracts minerals and sells them during the alternate valuation period, gain or loss on sale is tied to their “in place” value on the date of sale (i.e., the alternate valuation date) without any reduction for depletion.  Rev. Rul. 66-348, 1966-2 CB 433, as clarified by Rev. Rul. 71-317 CB 328.  The “in place” value pegs the adjusted income tax basis. 

Valuing deductions.  With an alternate valuation election in place, the decedent’s estate is not entitled to an estate tax loss deduction for the amount by which an item of property included in the estate was reduced by virtue of the election.  Form 706 instructions, p. 34 (Aug. 2019 version).  If a set percentage of the decedent’s adjusted gross estate is bequeathed to charity, the estate’s charitable deduction is determined by using the value of the decedent’s adjusted gross estate as of the alternate valuation date.  Rev. Rul. 70-527, 1970-2 CB 193.  The same rule (in terms of using the alternate valuation date) applies to determining the amount of any marital deduction.  I.R.C. §2032(b); Treas. Reg. §§20.2032-1(g); 20.2056(b)-4(a). 

An alternate valuation election can be coupled with a special use valuation election.  Rev. Rul. 83-31, 1983-1 CB 225. 

Application of the Alternate Valuation Election

As indicated above, the decedent’s gross estate must be a taxable estate.  Treas. Reg. § 20.2032-1(b)(1) (1958); Tax Reform Act of 1984, Sec. 1923(a), 98th Cong., 2d Sess. (1984). The purpose of making an alternate valuation election is to lessen the federal estate tax burden if values decline in the six-month period immediately following death.  Consider the following example:

Example:  Marcia, a widow, died on September 16, 2019, with a taxable estate of $15 million.  At the time of her death she had an available estate tax exclusion of $11.40 million.  Assume that the federal estate tax liability of Marcia’s estate, if her estate were valued as of the date of death, would be $1,440,000.  Marcia’s estate consisted largely of publicly traded stock and, given the stock market plunge, was valued at $12 million on March 16, 2020 – six months after the date of her death.  If the executor of Marcia’s estate elected alternate valuation, the resulting federal estate tax would be approximately $240,000.  The election save’s Marcia’s estate $1,200,000 in federal estate tax.

As noted above, non-taxable estates cannot make an alternate valuation election.  If an estate would not be subject to federal estate tax, an alternate valuation election could allow the estate’s heirs to obtain a higher income tax basis on property included in the gross estate if values had risen after death.  That’s because of the income tax basis rule specifying that an asset included in a decedent’s estate receives an income tax basis equal to the asset’s fair market value in the recipient’s hands as of the date of death.  Eligibility for an alternate valuation election requires that both the taxable value of the estate decline by making the election and the estate tax liability decline.  If the value of the taxable estate drops during the six-month post-death period due to expenses being paid, no separate deduction is allowed for the expenses in computing the taxable estate.  I.R.C. §2032(b).   

The election is made by checking “Yes” on line 1 of Part 3 of Form 706 (the federal estate tax return) that is filed within one year after its due date (including extensions).  I.R.C. §2032(d)(2); Estate of Eddy v. Comr., 115 T.C. 135 (2000).  Thus, the election may only be made on the last estate tax return filed on or before the due date of the return (including extensions of time to file actually granted) or, if a timely return is not filed, the first estate tax return filed after the due date, provided the return is filed no later than one year after the due date (including extensions of time to file actually granted).  Treas. Reg. §20.2032-1(b)(1).  Application for an extension of time to make the election, or a protective election, can be made after the expiration of the one-year period from the return’s due date if the return is filed no later than one year after the due date (including extensions).  Preamble to TD 9172, Jan. 3, 2005.  A protective election allows the alternate valuation date to be used if it is subsequently determined that the transfer taxes upon death will be lower based on the alternate valuation rather than based on the date of death value of the gross estate.  See, e.g., C.C.A. 201926013 (May 30, 2019).   

When an alternate valuation election is made, the Form 706 must include: (1) an itemized description of all property in the estate on the date of death and the value of each item on that date; (2) an itemized disclosure of all distributions, sales, exchanges and other dispositions of property, and the date of each, during the six month period after the date of death; and (3) the value of each item of property on the valuation date under the election.  Interest and rents accrued as of death and dividends declared on or before death that aren’t collected as of the date of death are to be separately stated.  Treas. Reg. §20.6018-3(c)(6).  Dispositions of estate property during the six-month post-death period must be substantiated.  See, e.g., Treas. Reg. §20.6018-4(e). 

The Matter of “Included” and “Excluded” Property

For most businesses, alternate valuation is straightforward.  There is one value as of the date of death and a different value six months after death.  However, in an agricultural estate many things occur during the six-month period immediately following the decedent’s death.  For example, a decedent may have planted a crop shortly before death, which was harvested and sold within six months after death.  Or perhaps the decedent had cows that were bred before the date of death and calved after death and were sold after the six-month period following death.  When an alternate valuation election is made, not included in the estate’s valuation are any items that are income that the estate’s assets produce after the decedent’s death.   

Help in determining whether these types of property are subject to alternate valuation invokes the concepts of “included” and “excluded” property.  Included property is all property that is in existence at death that is part of the decedent’s gross estate.  Included property is valued six months after death or as of the date of sale, whichever comes first.  Treas. Reg. §20.2032-1(d).  Thus, crops that are growing as of the date of death and are harvested and sold after death are valued as of the earlier of six months after death or the date of sale.  Likewise, leased real estate or personal property and rents accrued to the date of the decedent’s death are included property.  The underlying property and the accrued rents are to be valued separately.  Rental amounts that accrue post-death and before the alternate valuation date are excluded property.  If rent is paid in advance, it is to be treated similarly to advance payment of interest on obligations.  Treas. Reg. §20.2032-1(d)(2). 

Excluded property is property that is excluded from the gross value of the decedent’s estate under the alternate valuation election.  Thus, income that is earned or accrued (whether received or not) after the date of the decedent’s death and during the alternate valuation period with respect to any property interest existing at the date of death is excluded property.  This is the result unless such property is a form of included property itself or it represents the receipt of included property.  Treas. Reg. §20.2032-1(d).  For example, crops that are planted after death are ignored for purposes of alternate valuation.  For property that exists as of the date of death and is disposed of gradually during the six-month period after death (such as silage that is fed during the six-month period following death), every day’s feeding is a disposition.  Thus, a calculation must be made not only as to the value, but as to how much disappeared.  The same is true of shelled corn, hay, or similar items.  The inventory must show the disappearance over that time period, and some value must be attached to it.


The recent and dramatic decline in the stock market provides an opportunity for substantial estate tax savings for estate with the “right” set of facts.  It’s all a matter of timing.  For the time being, alternate valuation is “in vogue.”

March 17, 2020 in Estate Planning | Permalink | Comments (0)

Friday, March 13, 2020

More Selected Caselaw Developments of Relevance to Ag Producers


Periodically on this blog I write about recent caselaw and IRS developments that farmers, ranchers and others should be aware about.  The courts are constantly churning out cases that are important to agriculture and tax developments are always non-stop.  It’s amazing how broad the reach is of the issues the courts and IRS address that touches agriculture in one way or another.  Many of these issues may not be given much thought on a daily basis, but perhaps they should.

In today’s post, I look at a few more recent developments of relevance to agriculture – it’s the focus of today’s post.

IRS Loses Valuation Case

Grieve v. Comr., T.C. Memo. 2020-28

When interests in closely-held businesses are transferred, either by death or gift, and either federal estate or gift tax is involved, the valuation issue becomes highly relevant.  For farms and ranches, blocks of non-controlling stock may be involved and the IRS may seek to apply a premium to the value of the stock to increase estate or gift taxes owed.  Recently, the U.S. Tax Court shot down an IRS attempt to attach a premium to a gift of non-controlling stock among family members. 

In the case, after the petitioner’s wife died, he formed two LLCs (Rabbit and Angus) for financial management and estate planning purposes. He then transferred some of the Class B shares of Rabbit to a grantor-retained annuity trust (GRAT) and the Class B shares of Angus to an irrevocable trust. The petitioner filed a 2013 gift tax return (Form 709) and attached appraisal reports that reported a taxable gift of nearly $10 million. The IRS rejected that valuation, claiming that the proper valuation was $17.8 million, and issued a notice of deficiency.

The Tax Court examined both appraisal reports, noting that the petitioner’s appraisal reports included independent analysis of the LLC shares using a combination of market and income approaches to determine the total value. Conversely, the Tax Court noted that the IRS included an assumption that selling the Class B share would encourage the petitioner’s daughter (who solely owned the Class A shares) to sell her 0.2 percent interest in the entities, which would increase the petitioner’s interests. However, the daughter testified that she would not be inclined to sell her interest, and if she were to sell, would seek a much higher premium that the IRS estimated. The Tax Court also determined that the IRS appraisal also relied on additional hypothetical scenarios that were inconsistent and insufficient to consider a change to the petitioner’s appraisal and the discounts concluded in the report. In addition, the Tax Court noted that the IRS appraiser failed to provide support for the valuations, and also did not provide evidence that his appraisal methodology was subject to peer review.

The Tax Court concluded that the IRS failed to provide sufficient evident to support its expert appraiser’s conclusion that the interests of the LLCs were undervalued and that the petitioner’s gifts of the assets to the two trusts were likewise undervalued. The Tax Court rejected the IRS position that the petitioner had underreported gift tax by $4.4 million and also rejected the IRS penalties of $600,000. 

IRAs and the Constitution

Conard v. Comr., 154 T.C. No. 6 (2020)

So that people are disincentivized from using their retirement savings for things other than retirement, the IRS hits withdrawals before age 59-1/2 with a 10 percent penalty.  Exceptions to the penalty apply, but even if a taxpayer fits within an exception the amount withdrawn still must be reported into income.  Exemptions include distributions made post-death; because the account owner is total and permanently disabled, to cover qualified post-secondary education expenses; distributions made after being called to active military duty for 180 days; or within a year of a child’s birth or adoption. 

The U.S. Tax Court recently dealt with a constitutional challenge to such penalty exemptions.  In the case, the petitioner had not yet reached age 59-1/2 at the time the she received a distribution from a qualified retirement plan. Consequently, the IRS assessed the 10 percent early withdrawal penalty of I.R.C. §72(t). She sought review of the asserted tax deficiency and challenged the additional tax on the basis that the application of the tax to her early distribution violated the Constitution’s Fifth Amendment Due Process Clause because exceptions exist to the penalty that are applicable to taxpayers that haven’t reached age 59-1/2, such as for disability, etc.

The Tax Court disagreed, applying the rational basis test (low-level scrutiny) to evaluate the constitutionality of the Code provision. The Tax Court determined that test applied because the provision did not invade a substantive constitutional right or freedom or involve a suspect classification. As a result, the constitutionality of the provision could only be overcome by an explicit demonstration that the statute established hostile and oppressive discrimination against particular persons and classes. The Tax Court noted that the petitioner did not claim that the penalty provision concerned a substantive constitutional right or freedom or involved a suspect classification. Age is not a suspect classification for purposes of equal protection. Thus, the provision was presumed constitutional if it had a legitimate governmental purpose. The Tax Court noted that Committee Reports concerning the provision provided that the statute aimed “to provide means for financing retirement” and that penalties for early withdrawals were “designed to insure that retirement plans will not be used for other purposes.” An exemption from the penalty for disability, for example, satisfied a legitimate objective of encouraging taxpayers to provide for times of inability to work. 

Huge FBAR Penalty Imposed

United States v. Ott, No. 18-cv-12174, 2020 U.S. Dist. LEXIS 32514 (E.D. Mich. Feb. 26, 2020)

In recent years, some farmers and ranchers have started operations in locations other than the United States.  Others may have bank accounts in foreign jurisdictions.  Still others may serve as an agent under a power of attorney for someone that has a bank account in a foreign jurisdiction.  In that event, every year, under the Bank Secrecy Act, anyone that owns or has an interest in or signature authority over certain foreign accounts such as bank accounts, brokerage accounts and mutual funds, must report the account(s) by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.  The proper box must also be checked on Schedule B of Form 1040.  Failure to do so can trigger a penalty.  Willful failure to do so can result in a monstrous penalty.  A recent case points out how bad the penalty can be for misreporting.

In the case, the taxpayer had a foreign bank account with aggregate highest balance of $1.9 million, $770,000 and $1.76 million for the three tax years at issue. Form 1040, Schedule B contains a question with a box to be checked asking whether the taxpayer had a financial interest in or signature authority over a financial account located in a foreign country. The box on Schedule B was checked “No” which was the default in the software that the return preparer used. The taxpayer also did not file an FBAR Form for any of the three years. The FBAR Form is required to be filed when the aggregate account balance exceeds $10,000.

The IRS claimed that the taxpayer had constructive knowledge of his reporting requirements by signing his tax returns which included a reference to the FBAR on Schedule B, and that the naming his sister's Canadian address on the accounts was an act of concealment. The taxpayer argued that he was simply negligent and there was no will failure to file the FBARs. The Court examined the definition of willfulness for purposes of FBAR filing and concluded that the taxpayer could have easily determined the need to file the FBAR. Accordingly, the court held that the taxpayer willfully failed to file the FBAR Form and assessed penalties for the years at issue in the amount of $988,245. 

Lakes Have Constitutional Rights?

Drewes Farms Partnership v. City of Toledo, No. 3:19 CV 434, 2020 WL 966628 (N.D. Ohio Feb. 27, 2020) No. 3:19 CV 434 2020 U.S. Dist. LEXIS 36427 (N.D. Ohio Feb. 27, 2020)

The genesis of this case actually began in a bar in Toledo (no word on whether the bar was across from the depot).  Apparently, the inebriated were commiserating over the pollution of Lake Erie.  Ultimately, the ideas of that night got formulated into a ballot question at a special election for the citizens of Toledo concerning whether Lake Erie should be granted legal rights that people have.  It was the first rights-based legislation in the U.S. aimed at protecting an ecosystem – Lake Erie, its tributaries and the species that live there. 

When election time came, sufficient Toledo citizens voted to add the “Lake Erie Bill of Rights” (LEBOR) to the city’s charter in early 2019. The LEBOR prohibited any infringement of the “rights” of Lake Erie to “exist, flourish, and naturally evolve” without explaining the kind of conduct that would infringe those “rights.” The plaintiff, a farming operation that grows crops in four counties near Toledo and Lake Erie, sued to invalidate the LEBOR on constitutional grounds for lack of due process as being void for vagueness. The court agreed and vacated the LEBOR in its entirety. 


There are always developments involving agriculture.  It’s good to stay informed. 

March 13, 2020 in Business Planning, Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Wednesday, March 11, 2020

What Is a “Trade or Business” For Purposes of Installment Payment of Federal Estate Tax?


Normally, federal estate tax is due nine months after death.  For estates that are illiquid, such as many taxable farm and ranch estates, there is a useful option.  Upon satisfying two requirements, the estate executor can elect under I.R.C. §6166 to pay the federal estate tax attributable to the decedent’s interest in a closely-held business in installments over (approximately) fifteen years. 

The two eligibility tests that must be satisfied for an estate to qualify for installment payment of federal estate tax are: (1) the decedent must have an interest in a closely-held business (I.R.C. §6166(a)(1)); and (2) the interest in the closely held business must exceed 35 percent of the value of the decedent’s adjusted gross estate. I.R.C. §6166(a)(1). An “interest in a closely-held business” means an interest as a proprietor in a trade or business carried on by a proprietorship; an interest as a partner in a partnership carrying on a trade or business; or stock in a corporation carrying on a trade or business.  I.R.C. §6166(b)(1).  Only those assets actually utilized in the trade or business are to be included in the decedent's interest in the closely held business.  Treas. Reg. §20.6166A-2(c).  

Does ownership of real property constitute a trade or business?  That’s an important question for farmers and ranchers.  Real estate (and associated real property structures) often is the largest asset (in terms of value) of the gross estate. 

Owning real property as a “trade or business” for purposes of deferring federal estate tax – it’s the topic of today’s post.

Farming Activities, I.R.C. §6166 and “Trade or Business”

Real estate that the decedent holds passively will not qualify for deferral under I.R.C. §6166.  For example, a mere royalty interest in oil and gas property is insufficient to constitute a trade or business.  Rev. Rul. 61-55, 1961-1 C.B. 713.  The real estate must be used by the decedent in the active conduct of a trade or business.  Over the years, the IRS has provided guidance on where the line is drawn between the passive holding of real estate and the use of it in the trade or business of farming.  In addition, the determination of whether the decedent had an interest in a closely-held business is made immediately before the decedent’s death.  I.R.C. §6166(b)(2)(A). 

1975 IRS Ruling.  In 1975, the IRS laid out its position on the determination of a trade or business in a farm context under I.R.C. §6166.  Rev. Rul. 75-366, 1975-2 C.B. 472.  The ruling, is still applicable for determining the existence of a trade or business in the I.R.C. §6166 context.  The facts of Rev. Rul. 75-366 involved a crop-share lease where the decedent as landlord paid 40 percent of the expenses incurred under the lease and received 40 percent of the crops.  The IRS found it critical that the decedent’s income under the lease was based on the farm’s productivity rather than simply being a fixed rental amount. The decedent had also actively participated in farm management decisionmaking concerning the crops to plant and how the farming operation should participate in federal farm programs.  The decedent also made trips to the farm on almost a daily basis to inspect the crops and discuss farming operations with the tenant farmers.  He also sometimes delivered supplies to the farm.  Based on these facts, the decedent’s involvement was deemed sufficient to constitute an interest in a closely held business for purposes of I.R.C. §6166 because the decedent was engaged in the trade or business of farming.  The ruling also pointed out that a “plain vanilla” cash rent lease would be unlikely to constitute an interest in a trade or business.   

1980s private rulings.  The IRS followed-up its 1975 Revenue Ruling with several private letter rulings in the early 1980s.  In Priv. Ltr. Rul. 8020101 (Feb. 25, 1980), the IRS concluded that a 97-year old farmer did not use his farmland in the trade or business of farming where he had given his livestock to his children less than a year before he died and then “leased” his land to them.  He was not actively farming at the time of his death due to his health. The IRS based its conclusion on the basis that the livestock had been gifted before death and the children were not required to make rental payments for the land (in return for paying the real estate taxes and operating costs).  They also didn’t manage the farm as the decedent’s agents.  It’s interesting to note that for the year of the decedent’s death, the federal estate tax exemption was $134,000 and the maximum estate tax rate was 70 percent.

Contrast that private letter ruling with Priv. Ltr. Rul. 8020143 (Feb. 26, 1980).  Here, the IRS determined that a decedent was engaged in the trade or business of farming where he cultivated, operated and managed farms for profit, either as the owner or tenant, and the rental income that he received was based on production (crop-share) rather than being a fixed amount.  The decedent paid all of the property taxes, paid for maintaining fences and structures on the farm, and also paid for ditching, draining and general farmland maintenance.  He also paid a share of farm input costs and other operating costs.  He was also engaged in management decisions by determining what crops would be planted, the timing of planting and how the crops would be marketed.  His decisionmaking involvement directly affected his economic return. 

In the context of I.R.C. §6166, the management activities of an employee or agent are imputed to the owner of the land.  For example, in Priv. Ltr. Rul. 8133015 (Apr. 29, 1981), the decedent operated two farms until becoming incapacitated by a stroke almost five years before he died.  At that time, the decedent’s wife began actively managing the farms, but neither the decedent nor the decedent’s spouse performed any physical labor on the farms.  The farms were crop-share leased to different tenants.  The IRS determined that the decedent owned an interest in the farms via his wife (she was deemed to be managing the farms on his behalf) and was deemed to be engaged in the trade or business of farming. 

A similar result was reached in Priv. Ltr. Rul. 8244003 (May 1, 1981), where the farm was operated by the decedent’s daughter and son-in-law on a crop-share basis.  The decedent was elderly and infirm.  The IRS concluded that it was immaterial that the decedent didn’t pay self-employment tax on her income from the farm.  For purposes of I.R.C. §6166, payment of self-employment tax was determined to be irrelevant on the issue of whether the decedent was engaged in the trade or business of farming.  See also Priv. Ltr. Rul. 8432007 (Apr. 9, 1984). 

In Priv. Ltr. Rul. 8515010 (Jan. 8, 1985), the IRS concluded that the cash rental of a pasture and barn failed did not constitute the trade or business of farming and, thus, did not qualify as interests in a closely-held business.  The decedent’s only involvement with respect to the pasture and barn was to provide routine maintenance.  Conversely, where a decedent leased an orchard for a fixed rental to a family corporation (of which the decedent was the majority shareholder) that conducted farming operations, the decedent was deemed to be engaged in the trade or business of farming because he was determined to be closely involved in both the leasing of his farm properties and the running of the family corporation.  Gettysburg National Bank v. United States, No. 1:CV-90-1607, 1992 U.S. Dist. LEXIS 12152 (M.D. Pa. Jul. 17, 1992).

More private rulings.  In Tech. Adv. Memo. 9403004 (Oct. 8, 1993), the IRS concluded that the decedent was not engaged in the trade or business of farming where he received a fixed rental amount for leasing land.  It was deemed to be a passive income-producing investment asset.  In Tech. Adv. Memo. 9635004 (May 15, 1996), the decedent operated a cattle ranch at the time of his death with his son via a partnership owned two-thirds by the decedent and one-third by the son.  There was no question that the cattle ranch was an active trade or business or that the decedent actively participated in all aspects of the ranch’s management and operation.  Both the decedent and his son owned land individually that was used in the ranching business.  The partnership paid the real estate taxes on the land as well as the cost of maintaining fences and insurance.  No rent was paid to either the decedent or his son.  The IRS determined that the land the decedent owned that the partnership used in the cattle ranching business was used in the trade or business of farming for purposes of I.R.C. §6166.  The IRS based its conclusion on the fact that the decedent’s activities were conducted in the overall scope of his income-producing cattle ranching business and the real estate was a fundamental part of the overall ranching business.  The IRS also noted that the decedent owned the land at the time of his death.  These were all important key factors and persuaded the IRS even though the partnership didn’t own the land.      

The multi-factor test.  In 2006, IRS clarified that, to be an interest in a trade or business under I.R.C. §6166, a decedent must conduct an active trade or business or must hold an interest in a partnership, LLC or corporation that itself carries on an active trade or business.   Rev. Rul. 2006-34, 2006-1 C.B. 1171. In the ruling, IRS set forth a list of non-exclusive factors to determine whether a decedent’s interest is an active trade or business. The factors are:  (1) the amount of time the decedent (or agents or employees) spent in the business; (2) whether an office was maintained from which the activities were conducted or coordinated and whether regular office hours are maintained; (3) the extent to which the decedent was actively involved in finding new tenants and negotiating and executing leases; (4) the extent to which the decedent provided landscaping, grounds care or other services beyond the furnishing of the leased premises; (5) the extent to which the decedent personally made, arranged for or supervised repairs and maintenance on the property; and (6) the extent to which the decedent handled tenant requests for repairs and complaints. 

In addition, the IRS stated in Rev. Rul. 2006-34 that an independent contractor (or other third-party) can conduct some of the activities and the underlying activity can still constitute a trade or business unless the third-party activities simply constitute holding investment property.   


The present $11.58 million exemption for federal estate tax means that very few farms and ranches will be subject to the tax.  That makes installment payment of federal estate tax largely irrelevant.  But, for those that do face federal estate tax liability, the opportunity to pay the tax over time rather than in full within nine months after death can be very important.  In addition, if the political winds change and the exemption collapses, many family farms and ranches could be subject to the tax.  It’s also important to remember that under present law, the exemption automatically drops significantly for deaths after 2025.

The closely-held business requirement as applied to real estate and as defined by use in the active conduct of a trade or business, is a large component of eligibility for land in a farming or ranching operation.  Land leases should be something other than a straightforward cash lease with at least active involvement in decision making by the decedent-to-be, or an agent or employee of the decedent-to-be.  Self-employment tax is not a crucial factor, but passive rental arrangements such as cash rent leases, are not eligible.  For assets leased to business entities, the test is applied separately to the business entity and the leased assets.  Land held in a revocable living trust is eligible for installment payment of federal estate tax if it is a “grantor” trust. 

March 11, 2020 in Estate Planning | Permalink | Comments (0)

Thursday, March 5, 2020

Registration Open For Summer Ag Income Tax/Estate and Business Planning Seminar


Registration is now open for this summer’s national ag tax and estate/business planning conference in Deadwood, South Dakota.  The conference is set for July 20-21 at The Lodge at Deadwood.  In today’s post I briefly summarize the conference, the featured speakers and registration.

Deadwood, South Dakota - July 20-21, 2020

The conference will be in Deadwood, South Dakota on July 20 and 21.  The event is sponsored by the Washburn University School of Law.  The Kansas State University Department of Agricultural Economics is a co-sponsor. Some of the morning and afternoon breaks are sponsored by SkySon Financial and Safe Harbour Exchange, LLC.  The location is The Lodge at Deadwood.  The Lodge is relatively new, opening in 2009.  It is located just west of Deadwood on a bluff that overlooks the town.  You can learn more about The Lodge here:  The Lodge has great conference facilities and also contains the Deadwood Grille featuring Western dining.  For families with children, The Lodge contains an indoor water playland.  There is also transportation from The Lodge to Main street in Deadwood where the shops and local attractions are located.  Deadwood is in the Black Hills area of western South Dakota.  Nearby is Mt. Rushmore, Crazy Horse, Custer State Park, Devil’s Tower and Rapid City.  The closest flight connection is via Rapid City.  The Deadwood area is a beautiful area, and the weather in late July should be fabulous. 

Featured Speakers

On Day 1, July 20, joining me on the program will be Paul Neiffer.  Paul has been doing the summer seminars with me for several years now and is affiliated with CliftonLarsonAllen, LLP.  We enjoy working together to provide the best in ag tax education that you can find.  We will discuss new cases and IRS developments; GAAP Accounting; restructuring credit lines; deducting bad debts; forgiving installment sale debt and some passive loss issues.  We will also get into advanced tax planning issues associated with the qualified business income deduction of I.R.C. Sec. 199A as well as net operating loss issues under the new rules; FSA advanced planning and like-kind exchanges when I.R.C. §1245 property is involved. 

Also with us as a Day 1 speaker is the honorable Judge Elizabeth Paris of the U.S. Tax Court.  She will provide an informative session on litigating a case before the U.S. Tax Court and the special rules and procedures of the court – what you need to know before filing a case with the Tax Court.  Judge Paris has issued opinions in several important ag cases during her tenure on the court, including Martin v. Comr., 149 T.C. 293 (2017), and is a great speaker.  You won’t want to miss her session.

I will lead off Day 2, July 21, with coverage of the most recent ag-related cases and rulings impacted farm and ranch estate and business planning.  Also joining me on Day 2 will be Prof. Jeffrey Jackson, a colleague of mine at Washburn University School of Law.  He will present a session on gun trusts for holding firearms and the unique issues that passing firearms at death can present.  Prof. Jackson will discuss what a gun trust is and how it works, what it cannot do, and client counseling with respect to passage of firearms by gift or at death.  Prof. Jackson's presentation will be followed by a session involving a comprehensive review of the new rules surrounding retirement planning after the SECURE act by Brandon Ruopp, an attorney from Marshalltown, Iowa.  

Also making a presentation on Day 2 will be Marc Vianello.  Marc is a CPA and the managing member of Vianello Forensic Consulting, LLC.  He is an experienced financial professional with and intensive 30-year history as a forensic accountant and expert witness regarding damages in highly complex litigation, including breach of contract, intellectual property (patent, Lanham, trade secret, copyright), business valuation, franchise, agriculture, Qui Tam and class action, personal injury, employment, casualties, financial crimes, and all other types of income and valuation damages. Marc also has an extensive background regarding the computation of estate and gift tax discounts for lack of marketability.  Marc’s presentation will focus on how practitioners can utilize forensic accounting techniques and expert testimony to bolster a client’s position against the IRS on audit as well as in court.

Other topics that I will address on Day 2 include the common estate planning mistakes of farmers and ranchers; post-death management of the farm or ranch business; and the valuation of farm chattels and marketing rights.

Day 2 will conclude with an hour session on ethics.  Prof. Shawn Leisinger of Washburn School of Law will present a session on the ethical issues related to risk I the legal context and how to ethically advise clients concerning risk decisions. 


If you are unable to join us in-person for the two-day event in Deadwood, the conference will be broadcast live over the web.  The webcast will be handled by Glen McBeth.  Glen handles Instructional Technology at the law library at the law school.  Glen has broadcast the last few summer seminars and does a tremendous job producing a high-quality webcast. 

Room Block

A room block has been established at The Lodge for conference attendees under Washburn University School of Law.  The rate is $169 per night and is valid from July 17 through July 22.  The room block will release on June 19.  The Lodge does not have an online link for reservations, but you may call the front desk at (877) 393-5634 and tell them they need to make reservations under the Washburn University Law School room block.  As noted, the room block begins the weekend before the seminar begins so that you can arrive early and enjoy the weekend in Deadwood and the Black Hills area before conference if you’d like. 

Alumni Event

Washburn’s law school will also be holding an alumni event at The Lodge that corresponds with the summer seminar.  There will be a social event for law school alumni and registrants of the summer seminar on Sunday evening, July 19.  That event will be followed the next day with a CLE seminar focusing on law and technology.  This CLE event will also be at The Lodge and will run simultaneously with Day 1 of the two-day summer seminar on July 20.  The summer seminar will continue on July 21.


If your business is interested in sponsoring a breakfast, break or lunch, and having vending space at the conference, please let me know.  It’s a great event to interact with practitioners that represent the legal and tax needs of farmers and ranchers from across the country that are involved in many aspects of agriculture.


If you have farm or ranch clients that you work with on tax, estate or business planning, this conference is an outstanding opportunity to receive specialized training in ag tax in these areas and interact with others.  The conference is also appropriate for agribusiness professionals, rural landowners and agricultural producers. 

More detailed information about the conference and registration information is available here:  I look forward to seeing you in Deadwood or having you participate via the web.   

March 5, 2020 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Thursday, February 20, 2020

Recent Developments Involving Estates and Trusts


A key aspect of transitioning assets and family business interests to the next generation is maintaining family harmony.  Often, that is accomplished when an estate plan is properly put together and takes effect seamlessly at death.  When that doesn’t occur is when disharmony among family members can occur and disrupt the transition to the next generation.  Sometimes family dynamics prevent a smooth transition.  Other times, improper planning or technical errors in the estate plan are the cause of unfulfilled expectations. In still other situations, the estate planning techniques utilized don’t end up functioning as planned. Some recent court decisions illustrate just a snippet of the issues that can arise at death.

Some recent estate and trust court decisions – that’s the topic of today’s post.

A TOD Account as a Fraudulent Transfer?

Heritage Properties v. Walt & Lee Keenihan Foundation, 2019 Ark. 371 (2019)

The plaintiff in this case was a creditor in the decedent’s estate. Before death, the decedent created a brokerage account with $500,000 and designated the defendant as the transfer-on-death (TOD) recipient. The decedent died 18 months after establishing the account at a time when the account value was $1.1 million. Upon the decedent’s death, the $1.1 million in the account transferred automatically to the defendant outside of the decedent’s probate estate. The plaintiff filed a claim against the decedent’s estate for $850,000 which made the estate insolvent. The plaintiff sued the estate in the local trial court rather than the probate court, claiming that the TOD account resulting in a transfer of the $1.1 million to the defendant was a fraudulent transfer designed to defeat the plaintiff’s claim.

The trial court dismissed the case for lack of jurisdiction, standing and lack of sufficient evidence. On further review, the state Supreme Court held that the trial court did have jurisdiction as a court of general jurisdiction and that the plaintiff had standing to directly pursue the estate for return of an allegedly fraudulent transfer.  The Court couched its reasoning on the fact that the TOD account was not part of the probate estate. The Court also clarified that the plaintiff didn’t have to show that the decedent had actual intent to defraud the creditor. Instead, the court concluded, the plaintiff only needed to prove that the decedent made the transfer and "intended to incur, or believed or reasonably should have believed that she would incur, debts beyond her ability to pay as they became due."  That’s a rather low standard of proof to overcome.

Trust Failure 

Doll v. Post, 132 N.E.3d 34 (Ind. Ct. App. 2019)

The decedent created a trust in 2010 and amended it before his death in 2018. The trust made specific bequests to the plaintiff, two other individuals, a masonic lodge, and Shriners hospital. The trust contained a residuary clause that stated: “Residue of Trust Property: The Trustee shall hold, distribute and pay the remaining principal and undistributed income in perpetuity; subject, however, to limitations imposed by law. All the powers given by law and the provision[s] of the [T]rust may be exercised in the sole discretion of the Trustee without prior authority above or subsequent approval by any court.”

One of the people who was to receive a specific bequest could not be located. At the time of the decedent’s death, approximately $4,600 remained in the residuary, and the trustee distributed it to charity. The plaintiff moved to intervene arguing that the residuary clause failed, and the remainder should pass to her.

The trial court found that the trust document was ambiguous, and entertained outside evidence. Based on that extrinsic evidence, the court found that the decedent’s intent was to create a charitable trust and that the trustee’s act was proper. On appeal, the appellate court reversed and remanded. The appellate court determined that the trust document did not give the trustee the unfettered authority to distribute the residuary, and that the trustee was bound to follow local law. Local law specified that if the decedent’s intent was not explicit the trustee should select a beneficiary "from an indefinite class," identify a beneficiary with "reasonable certainty," or find a beneficiary capable of being "ascertained." The appellate court determined that the trustee could not find such a beneficiary and that the trust was not purely a charitable trust because some of the named beneficiaries were individuals.

The appellate court also determined that the cy pres doctrine did not apply.  The cy pres doctrine allows a court to amend the terms of a charitable trust as closely as possible to the original intention of the testator or settlor to prevent the trust from failing.  But, the cy pres doctrine did not apply, the appellate court reasoned, because the trust did not not have general granting language stating the trust’s purpose was charitable, and the charitable portions of the trust were fulfilled with the specific bequests.  Consequently, the residuary clause unambiguously failed to designate a beneficiary with reasonable certainty or a beneficiary capable of being ascertained and failed as a matter of law. The appellate court ordered the trustee to hold the residue of the estate and distribute it in accordance with state intestacy law. 

Homestead Provision Applicable in Will Construction Battle

Chambers v. Bockman, 2019 Ohio 3538 (Ohio Ct. App. 2019)

The decedent and surviving spouse plaintiff married in 2009. The couple maintained separate residences for the most part. The decedent owned his home on a 1.08-acre tract.  Adjacent to this tract but separated by a fence was the decedent’s 55-acre tract where he raised cattle and horses. The decedent owned a third tract adjacent to the plaintiffs’ own home that was used as a rental property. The decedent died in June of 2017. The defendant was appointed executor of the estate. One portion of the decedent’s will specifically left the rental property to the plaintiff. The other portion of the will in dispute stated: “All of the rest, residue and remainder of my property, real, personal and/or mixed, of which I shall die seized, or to which I may be entitled, or over which I shall possess any power of appointment by Will at the time of my decease and wheresoever situated, whether acquired before or after the execution of this, my Will, to my friend, [defendant], absolutely and in fee simple.”

The decedent’s home and farm were appraised as one property and valued at $378,000. In mid-2018, the plaintiff filed a complaint in the probate court to purchase the decedent’s home and farm pursuant to state statute. The defendant countered that the home and farm did not qualify as a “mansion house” under applicable state law because the plaintiff never lived there; the will devised the home and the farm to the defendant; and the plaintiff was not entitled to purchase the home. The probate court, holding for the plaintiff, determined that residency was not required for the statute to apply; the bequest to the defendant was a general bequest that was not specific as to the home and farm; and the plaintiff was entitled to purchase the home and farm for $378,000. The appellate court affirmed.

While the appellate court agreed that the plaintiff could purchase the home if it were a “mansion home,” the court determined that it merely had to be a “home of the decedent” rather than the residence of the surviving spouse. It satisfied that requirement. The appellate court also upheld the trial court’s finding that the decedent did not specifically devise the real estate to the defendant. The farm being adjacent to the home meant that the two properties were operated as one and that the plaintiff could buy both the home and the farm. 


Even the best planning can result in unanticipated consequences upon death. 

February 20, 2020 in Estate Planning | Permalink | Comments (0)

Tuesday, February 18, 2020

More “Happenings” In Ag Law and Tax


The law impacts agricultural operations, rural landowners and agribusinesses in many ways.  On a daily basis, the courts address these issues.  Periodically, I devote a post to a “snippet” of some of the important developments.  Today, is one of those days.

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

IRS Rulings on Portability.

Priv. Ltr. Ruls. 201850015 (Sept. 5, 2018); 20152016 (Sept. 21, 2018); 201852018 (Sept. 18, 2018); 201902027 (Sept. 24, 2018); 201921008 (Dec. 19, 2018); 201923001 (Feb. 28, 2019); 201923014 (Feb. 19, 2019); 201929013 (Apr. 4, 2019).    

Portability of the federal estate tax exemption between married couples comes into play when the first spouse dies and the taxable value of the estate is insufficient to require the use of all of the deceased spouse's federal exemption (presently $11.58 million) from the federal estate tax. Portability allows the amount of the exemption that was not used for the deceased spouse's estate to be transferred to the surviving spouse's exemption so that the surviving spouse can use the deceased spouse's unused exemption plus the surviving spouse’s own exemption when the surviving spouse later dies.  Portability is accomplished by filing Form 706 in the deceased spouse’s and is for federal estate tax purposes only.  Some states that have a state estate tax also provide for portability at the state level.  That’s an important feature for those states – it’s often the case that a state’s estate tax exemption is much lower than the federal exemption.

Sometimes a tax election is not made on a timely basis.  Over the past year, the IRS issued numerous rulings on portability of the federal estate tax exemption and the election that must be made to port the unused portion of the exemption at the death of the first spouse over to the surviving spouse.  In general, each of the rulings involved a decedent that was survived by a spouse, and the estate did not file a timely return to make the portability election. The estate found out its failure to elect portability after the due date for making the election.  The IRS determined that where the value of the decedent's gross estate was less than the basic exclusion amount in the year of decedent's death (including taxable gifts made during the decedent’s lifetime), “section 9100 relief” was allowed. Treas. Reg. §§301.9100-1; 301.9100-3

The rulings did not permit a late portability election and section 9100 relief when the estate was over the filing threshold, even if no estate tax was owed because of the marital, charitable, or other deductions.   In addition, it’s important to remember that there is a 2-year rule under Rev. Proc. 2017-34, 2017-26 I.R.B. 1282 making it possible to file Form 706 for portability purposes without section 9100 relief

Not Establishing a Lawyer Trust Account Properly Results in Taxable Income. 

Isaacson v. Comr., T.C. Memo. 2020-17. 

Attorney trust accounts are critical to making sure that money given to lawyers by clients or third-parties is kept safe and isn’t comingled with law firm funds or used incorrectly. But most people (even some new lawyers) don’t fully understand attorney trust accounts.  An attorney trust account is basically a special bank account where client funds are stored for safekeeping until time for withdrawal.  The funds function to keep client funds separate from the funds of the lawyer or law firm.  For example, a trust account bars the lawyer from using a client’s retainer fee from being used to cover law firm operating costs unless the funds have been “earned.”  But, whether funds have been “earned” has special meaning when tax rules come into play – think constructive receipt here.  This was at issue in a recent Tax Court case. 

In the case, a lawyer received a contingency fee upon settling a case.  He deposited the funds in his lawyer trust account but did not report the deposited amount in his income for the tax year of the deposit claiming that his fee was in dispute and, thus, subject to a substantial limitation on his rights to the funds.  The IRS disagreed and claimed that the account was not properly established as a lawyer trust account under state (CA) law.  The IRS also pointed out that the petitioner commingled his funds with his clients’ funds which gave him access to the funds.  The IRS also asserted that the petitioner should have reported the amount in income even if he later had to repay some of the amount.  The Tax Court agreed with the IRS on the basis that the lawyer failed to properly establish and use the trust account and because the he had taken the opposite position with respect to the fee dispute in another court action.  The income was taxable in the year the IRS claimed. 

Semi-Trailer in Farm Field Near Roadway With Advertising Subject to Permit Requirement. 

Commonwealth v. Robards, 584 S.W.3d 295 (Ky. Ct. App. 2019).

Counties, towns, municipalities and villages all have various rules when it comes to billboard and similar advertising.  Sometimes those rules can intersect with agriculture, farming activities and rural land.  That intersection was displayed in a recent case.

In the case, the defendant owned farm ground along the interstate and parked his semi-trailer within view from the interstate that had a vinyl banner tied to it that advertised a quilt shop on his property.  The plaintiff (State Transportation Department) issued the defendant a letter telling him to remove the advertising material. The defendant requested an administrative hearing.  The sign was within 660 feet of the interstate and was clearly visible from the interstate. The defendant collected monthly rent of $300 from the owner of the quilt shop for the advertisement. The defendant never applied for a permit to display the banner. The defendant uses the trailer for farm storage and periodically moves it around his property. The administrative hearing resulted in a finding that the trailer was being used for advertising material and an order was adopted stating the vinyl sign had to be removed. The defendant did not appeal this order, but did not remove the banner.  The plaintiff sued to enforce the order. After the filing of the suit, the defendant removed the vinyl sign only to reveal a nearly identical painted-on sign beneath it with the same advertising. The plaintiffs amended their complaint alleging that the painted-on sign was the equivalent of the vinyl sign ordered to be removed and requesting that the trial court order its removal. The trial court found that the trailer with the painted-on sign was not advertising material as the semi-trailer was being used for agricultural purposes and was not an advertisement. The court did concede that the semi-trailer was within 660 feet of the right-of-way of the interstate; was clearly visible to travelers on the highway; had the purpose of attracting the attention of travelers; defendant received a monthly payment for maintaining the sign.  On further review, the appellate court reversed and remanded.  The appellate court concluded that the trailer served a dual purpose of agricultural use and advertising and that there was no blanket exemption for agricultural use.  The trailer otherwise satisfied the statutory definition as an advertisement because of its location, visibility, and collection of rental income. The appellate court concluded that the defendant could use the trailer for agricultural purposes in its current location, but that advertising on it was subject to a permit requirement. 

Lack of Basis Information in Appraisal Summary Dooms Charitable Deduction for Conservation Easement Donation. 

Oakhill Woods, LLC v. Comr., T.C. Memo. 2020-24.

 The tax Code allows an income tax deduction for owners of property who relinquish certain ownership rights via the grant of a permanent conservation easement to a qualified charity (e.g.,  to preserve the eased property for future generations).  I.R.C. §170(h).  But, abuses of the provision are not uncommon, and the IRS has developed detailed rules that must be followed for the charitable deduction to be claimed.  The IRS audits such transactions and has a high rate of success challenging the claimed tax benefits.

In this case, the petitioner executed a deed of conservation easement on 379 acres to a qualified land trust in 2010.  The deed recited the conservation purpose of the easement. The petitioner claimed a $7,949,000 charitable deduction for the donation. Included with the petitioner’s return was an appraisal and Form 8283 which requires, among other things, basis information concerning the gifted property or an attached reasonable cause explanation of why the information was not included with the return. Basis information was not included on Form 8283, and the petitioner attached a statement taking the position that such information was not necessary. The IRS denied the deduction for noncompliance with Treas. Reg. §1.170A-13(c)(2). The Tax Court agreed with the IRS, noting that the lack of cost basis information was fatal to the deduction as being more than a minor and unimportant departure from the requirements of the regulation. The Tax Court cited its prior opinion in Belair Woods, LLC v. Comr., T.C. Memo. 2018-159. The Tax Court also rejected the petitioner’s argument that Treas. Reg. §1.170A-13(c)(4)(i)(D) and (E) was invalid. The petitioner claimed that the basis information was required with the return and not the appraisal summary, but the Tax Court rejected this argument because a “return” includes all IRS forms and schedules that are required to be a part of the return. As such, Form 8283 was an essential part of the return. In addition, the Tax Court noted that the underlying statute absolutely required basis information to be included with the appraisal summary and, in any event, the IRS’ interpretation of the statute via the regulation was reasonable. 

Cram-Down Interest Rate Determined. 

In re Country Morning Farms, Inc., No. 19-00478-FPC11, 2020 Bankr. LEXIS 307 (E.D. Wash. Feb. 4, 2020).

A "cramdown" in a reorganization bankruptcy allows the debtor to reduce the principal balance of a debt to the value of the property securing it.  The creditor is entitled to receive the value, as of the effective date of the plan, equal to the allowed amount of the claim.  Thus, after a secured debt is written down to the fair market value of the collateral, with the amount of the debt in excess of the collateral value treated as unsecured debt which is generally discharged if not paid during the term of the plan, the creditor is entitled to the present value of the amount of the secured claim if the payments are stretched over a period of years.  11 U.S.C. §1129(b)(2)(A).    But, how is present value determined?  The U.S. Supreme Court offered clarity in 2004.  The matter of determining an appropriate discount rate was involved in a recent bankruptcy case involving a Washington dairy operation.

The debtor filed Chapter 11 bankruptcy and couldn’t agree with a creditor (a bank) on the appropriate interest rate to be used in the debtor’s reorganization plan. The parties agreed that the “Prime Plus” method set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004) was the appropriate method to determine the “cram down” interest rate.” The parties agreed that the prime rate was presently 4.75 percent and that an additional amount as a “risk factor” should be added to the prime rate. The debtor proposed a 6 percent interest rate, based on the risk associated with the dairy business. The bank claimed that the appropriate interest rate was 7.75 percent – the highest rate factor under the Till analysis. The bank cited the length of the plan, the volatility of dairy market, the debtor’s capital structure, and conflicting projections from an expert when determining the appropriate risk factor. The court determined that the appropriate interest rate was 7 percent which raised the interest rate on some of the debtor’s loans and lowering it on others. 


There’s never a dull moment in the world of ag law and ag tax.  These are just a few developments in recent weeks.

February 18, 2020 in Bankruptcy, Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, February 14, 2020

Summer 2020 Farm Income Tax/Estate and Business Planning Conference


Washburn University School of  Law in conjunction with the Department of Agricultural Economics at Kansas State University is sponsoring a farm income tax and farm estate/business planning seminar in Deadwood, South Dakota on July 20 and 21.  This is a premier event for practitioners with an agricultural clientele base, agribusiness professionals, farmers and ranchers, rural landowners and others with an interest in tax and planning issues affecting farm and ranch families.

For today’s post I detail the agenda for the event. 

Monday July 20

The first day of the conference begins with my annual update of developments in farm income tax from the courts and the IRS.  I will address the big ag tax issues over the past year.  That session will be followed up with a session on GAAP accounting and the changes that will affect farmer’s financial statements.  Topics that Paul Neiffer of CliftonLarsonAllen discuss will include revenue recognition and lease accounting changes.

After the morning break, I will examine several farm tax topics that are of current high importance – tax issues associated with restructuring credit lines; deducting bad debts; forgiving installment sale debt; and selected passive loss issues.  Paul will follow up my session with an hour of I.R.C. §199A advanced planning that can maximize the qualified business income deduction for clients. 

After the luncheon, U.S. Tax Court Judge Elizabeth Paris will speak for 90 minutes on practicing before the U.S. Tax Court.  She will present information all attorneys and CPAs need to consider if they are interested in representing clients in the U.S. Tax Court.  She will cover topics including the successful satisfaction of Tax Court notice pleading requirements; multiple exclusive jurisdictions of the Tax Court; troubleshooting potential conflicts and innocent spouse issues; utilizing S-Case procedures to a client’s advantage;  and available Tax Court website resources.

I will follow the afternoon break with a discussion of issues associated with net operating losses and excess business losses.  I will take a look at how the late 2017 tax legislation changed the rules for net operating losses and excess business losses – how the modified rules work; carrybacks and carryforwards; limitations; relevant guidance; business and non-business income; and entity sales. After my session, Paul will be back to discuss Farm Service Agency Advanced Planning and how to maximize a farm client’s receipt of ag program payments without sacrificing them at the altar of self-employment tax savings. 

For the final session of the day I will discuss  I will discuss real estate trades when I.R.C. §1245 property (such as grain bins and hog confinement buildings and other structures) is involved in the exchange. address the rules to know, how to identify and avoid the traps and the necessary forms to be filed   

Tuesday July 21

I will begin the second day of the conference by providing an update of key developments in the courts and the IRS over the past year that impact estate, business and succession planning for farmers and ranchers.  It will be a fast-paced survey of cases and rulings that practitioners must be aware of when planning farm and ranch estates and succession plans.  My opening session will be followed by a an hour session on how to incorporate a gun trust into an estate plan.  Prof. Jeff Jackson of Washburn Law School will lead the discussion and explore the basic operation of a gun trust to hold firearms and the mechanics of such a trust’s operation.  Jeff will discuss the reasons to create a gun trust; their effectiveness as an estate planning tool to hold firearms; common myths and understandings about what a gun trust can do; special rules associated with gun trusts; and client counseling issues associated with gun trusts.

After the morning break, Brandon Ruopp, a private practitioner from Marshalltown, Iowa, will provide a comprehensive review of the rules concerning contributions, rollovers, and required minimum distributions for IRA's and qualified retirement plans following the passage of the SECURE Act in late 2019.  I will follow Brandon’s session with a brief session on the common estate planning mistakes that farm and ranch families make that can be easily avoided if they are spotted soon enough.  With the many technical rules that govern estate and business planning, sometimes the “little things” loom large.  This session addresses these common issues that must be addressed with clients.

After the luncheon, I will provide a brief session on the post-death management of the family farm or ranch business.  I will discuss the issues that must be dealt with after the death of family member of the family business.  This session will also examine probate administration issues that commonly arise with respect to a farm or ranch estate, including the application of Farm Service Agency rules and requirements.  Also addressed will be distributional and tax issues; issues associated with partitioning property; handling marital property and disclaimers; potential CERCLA liability; and issues associated with estate tax audits.

Next up will be Marc Vianello, a CPA in the Kansas City area who is well-renown in the area of valuation discounting.  Marc’s session will provide a summary of Marc’s research into the market evidence of discounts for lack of marketability.  The presentation will challenge broadly used methodologies for determining discounts for lack of marketability, and illustrate why such discounts should be supported by probability-based option modeling. 

Following the afternoon break, I will discuss the valuation of farm chattels and marketing rights and the basic guidelines for determining the estate tax value of this type of farm property. 

The final session of the day will be devoted to ethics.  Prof. Shawn Leisinger at Washburn Law School will present an interesting session on ethical issues related to risk in a legal context and how to understand and advise clients.  Shawn’s presentation will look at how different people, and different attorneys, approach risk taking through a live exercise and application of academic risk approaches to the outcomes.  Then, the discussion looks at how an attorney can get competent and ethically advise clients concerning risk decisions in practice.  Participants will be challenged to contemplate how their personal approach to risk may impact, or fail to impact, client decisions and choices.

Law School Alumni Reception and CLE

On Sunday evening, July 19, Washburn Law School, in conjunction with the conference will be holding a law school alumni function.  Conference attendees are welcome to attend the reception.  On Monday, July 20, a separate CLE event will be held for law school alumni at the same venue of the conference.  Details on the alumni reception and the CLE topics will be forthcoming.


Registration for the conference will be available soon.  Be watching my website – for details as well as this blog.  The conference will be held at the Lodge at Deadwood.  A room block has been established for the weekend before the conference and for at least a day after the conference ends.


I hope to see you at Deadwood in July.  If you’re looking for high quality CPE/CLE for farm and ranch clients, this conference will be worth your time.

February 14, 2020 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Friday, January 17, 2020

Principles of Agricultural Law


Principles2020springedition400x533The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

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

Subject Areas

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

If you are interested in obtaining a copy, you can visit the link here:

January 17, 2020 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)

Wednesday, January 15, 2020

Ag Law in the Courts – Feedlots; Dicamba Drift; and Inadvertent Disinheritance


It’s been over two months since I last did a post surveying court action of interest to farmers and ranchers.  I owe readers a couple of those types of posts to catch up.  It’s not that the courts have been quiet.  They haven’t.  I have just been writing about other things – including top legal and tax developments of 2019.  So, for today’s post I take a look at a few recent developments in the courts – this time two court opinions each from Iowa and Missouri.  The issues involve livestock feeding facilities, Dicamba drift and disinheritance.

Ag law in the courts – that’s the topic of today’s post.

Time Limit for Suing a Livestock Facility on Nuisance Claims

Dvorak v. Oak Grove Cattle, L.L.C., No. 18-1624, 2019 Iowa App. LEXIS 743 (Iowa Ct. App. Aug. 7, 2019).

The plaintiffs owned property adjacent to the defendant’s cattle feedlot. The feedlot began operating in 2006 and was investigated in 2009 and 2013 by the Iowa Department of Natural Resources (IDNR) due to manure run-off issues. The IDNR required that the defendants take remedial action. In 2016 the plaintiffs sued for negligence, trespass, and nuisance. The plaintiffs claimed, "from approximately 2009 to the present there have been multiple occasions when manure from [the defendant’s] cattle lot has entered upon, and traversed over, [the plaintiffs’] property." The defendant countered with a claim for defamation, arguing that the plaintiffs made false statements about the feedlot and published it to third parties. The defendant moved for summary judgment arguing that the nuisance cause of action was barred by the five-year statute of limitations. The trial court granted the motion for summary judgment on the basis that the plaintiffs were claiming that the feedlot was a permanent nuisance from its inception in 2006.  Thus, the nuisance suit should have been brought within five years of that time, according to the defendant.  The plaintiffs did not make separate nuisance claims for each instance of runoff which would make their claims an intermittent nuisance.

On further review, the appellate court reversed and remanded. The only issue on appeal concerned the statute of limitations. The parties agreed that a five-year statute of limitations applied.  But, did it start to run from the time the feedlot was established, or upon each occurrence of manure runoff?  In other words, was the manure runoff a permanent nuisance or a continuing nuisance?  If the manure runoff constituted a permanent nuisance, the statute of limitations began to run in 2006 and would have expired in 2011. Conversely, If the manure runoff amounted to an intermittent nuisance, the statute of limitations would start upon each occurrence. The appellate court determined that the defendant failed to meet the burden of proof that the runoff was a permanent nuisance in order to sustain the motion for summary judgment. Permanence of a nuisance, the appellate court held, goes to the injury itself and the defendant did not show that the damage to the plaintiffs’ property could not be cleaned up or abated. Instead, the defendant relied upon the contention that the runoff from the feed lot was not temporary. The appellate court determined that he feedlot itself is a permanent nuisance but the runoff itself is a temporary nuisance. Thus, the plaintiffs’ suit was not time barred. 

CAFO Permit Properly Granted 

K Tre Holdings, LP v. Missouri Department of Natural Resources, No. SD35512, 2019 Mo. App. LEXIS 1146 (Ct. App. Jul. 26, 2019)

In early 2016, a farm applied for a "General Operating Permit" to operate a Class 1C poultry Confined Feeding Operation “CAFO” in southwest Missouri.  Later that year, the farm was issued a “State No-Discharge" CAFO operating permit. The plaintiff challenged the issuance before the Administrative Hearing Commission (ACH), and the ACH determined that the CAFO permit was issued in accordance with the applicable state law and regulations. In late 2017, the defendant (state Dept. of Natural Resources) affirmed. The plaintiff sued and that state appellate court affirmed. The appellate court noted that the farm provided a 2014 google map image with labels and setback distances marked. Other maps were also presented during the agency hearings and submitted as evidence. The appellate court determined that the defendant’s decision was supported by sufficient evidence. The maps provided the necessary information to determine whether the setback distance requirements had been satisfied. The appellate court also determined that the farm did not have to provide a copy of proposed building plans to obtain a building permit, and that the plaintiff could not challenge the ACH appointment of commissioners. 

Some Dicamba Drift Claims Proceed

Bader Farms, Inc. v. Monsanto Co., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. Jul. 10, 2019)

Dicamba drift issues have been in the news and the courts over the past couple of years.  In this case, the plaintiff claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) conspired to develop and market dicamba-tolerant seeds and dicamba-based herbicides. The plaintiff claimed that the damage to the peaches occurred when dicamba drifted to his peach orchard after being applied to neighboring fields. The plaintiff claimed that the defendants released the dicamba-tolerant seed with no corresponding dicamba herbicide that could be safely applied. As a result, farmers illegally sprayed an old formulation of dicamba herbicide that was unapproved for in-crop, over-the-top, use and was "volatile"  - meaning that it was highly likely to drift. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops.

Monsanto moved to dismiss the plaintiff’s claims that were based on failure to warn; negligent training; violation of the Missouri Crop Protection Act; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same claims except those for failure to warn. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the claims based on the Missouri Crop Protection Act, noting that civil actions under this act are limited to “field crops” which did not include peaches. The trial court did not dismiss the civil conspiracy claim based on concerted action by agreement, but did dismiss the aiding and abetting portion of the claim because that cause of action is not recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant.

The saga continues. 

Inadvertent Disinheritance – Words Means Things

In re Trust Under the Will of Daubendiek, 929 N.W.2d 723 (Iowa Ct. App. 2019)

This case has an unfortunate (and, I believe, incorrect result).  It points out that sometimes courts are willing to strictly apply the law even in light of a potentially absurd result.  It also points out that lawyers drafting wills and trusts have to carefully consider the words that they use and how those words might be applied years later.  

Here, the testator created a will in 1942 which contained a trust. The trust had nine beneficiaries and specified that in the event of a named beneficiary’s death, the beneficiary’s interest would pass to the beneficiary’s “lawful bodily issue.” The testator died in 1948, and in 1956 one of the named beneficiaries (a grandson of the testator) adopted a child. The grandson died in 2016, and the adopted child (great-grandson of the testator) sought court confirmation that he and his descendants were the “lawful bodily issue” of the beneficiary for purposes of the trust. The trial court disagreed and granted summary judgment for the trustee, effectively disinheriting the great-grandson.

On further review, the appellate court affirmed. While the appellate court noted that Iowa law presumes that a testator intends to treat an adopted child in the same manner as a natural born child, this presumption does not apply when an intent to exclude the adopted child is shown in the will. The appellate court held that intent to exclude was present by the testator’s repeated use of “lawful bodily issue” after denoting every named trust beneficiary to describe who received that share of the trust upon a particular beneficiary’s death. The appellate court cited a 1983 Iowa Supreme Court opinion where that Court said that a similar phrase, “heirs of the body,” did not include adopted children. The appellate court concluded that there was no reasonable interpretation of the will/trust that allowed for an adopted child who is not a beneficiary’s “lawful bodily issue” to receive a share of the trust.

An expert on wills and trusts (and my law school professor on the same subject) testified that lawyers often use “legalisms” without the client providing express direction for such terminology.  As such, in his view, the phraseology of the will was ambiguous and created a genuine issue of material fact.  That would have bearing on the issue of the testator’s intent – the “polestar” or directing principle of construing a will.  But, the court refused to consider the professor’s point as being a legal argument concerning a legal issue – an opinion as to a legal standard.  As such, the court said it would not be considered.  But with that said, the court did consider it and still concluded that the will was clear and the great-grandson was to be disinherited. 

I take issue with the appellate court’s opinion.   The court read "lawful bodily issue" in a way that disinherited the great grandson without the testator specifically saying that is what he wanted to do.  Normally, disinheriting someone requires the testator’s clearly expressed intention.  Did the attorney in 1942 explain what the phrase “lawful bodily issue” meant to the testator and the effect that it possibly could have 74 years later?  Highly unlikely.  At a minimum the phrase created an ambiguity.   Also, the appellate court made no mention of the fact that under Iowa law, a legally adopted child is treated as blood relation (“lawful bodily issue”) of the adoptive parent(s) for purposes of intestacy. Thus, had the grandson involved died intestate, Iowa law would have treated the great grandchild as “lawful bodily issue.” The appellate court did not address this potentially absurd result of its opinion – making disinheritance of a great grandson dependent on whether the great grandson’s father died without a will.

Words mean things – sometimes unintended things. 


I will do another post on more developments in the courts soon. 

January 15, 2020 in Civil Liabilities, Estate Planning | Permalink | Comments (0)

Tuesday, December 24, 2019

Year-End Legislation Contains Tax Extenders, Repealers and Modifications to Retirement Provisions


Last week, the Congress passed Omnibus spending bills containing multiple parts that impact retirement provisions and disaster relief tax rules.  The legislation also contains certain tax extender provisions and repeals of some of the taxes contained in Obamacare.  The President signed “The Further Consolidated Appropriations Act” (H.R. 1865, PL 116-94) and “The Consolidated Appropriations Act, 2020” (H.R. 1158, PL 116-93) into law on December 20.  Contained in the Omnibus legislation is the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (“Disaster Act”) which provides relief for taxpayers affected by disasters in 2018 through Jan. 19, 2020.  Also included in the Omnibus legislation is the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act).

New tax and retirement-related provisions – it’s the topic of today’s post.

Repealed Provisions

Obamacare.  The Omnibus legislation repeals the following taxes contained in Obamacare:

  • Effective January 1, 2014, §9010 of Obamacare imposed an annual flat fee on covered entities engaged in the business of providing health insurance with respect to certain health risks.  That tax is repealed effective for tax years beginning after 2020. Further Consolidated Appropriations Act of 2020, Div. N, Sec. 502. 
  • Obamacare added I.R.C. §4191(a) to impose an excise tax of 2.3 percent on the sale of a taxable medical device by the manufacturer, producer, or importer of the device for sales occurring after 2012. The new law repeals the excise tax for sales occurring after Dec. 31, 2019.  Further Consolidated Appropriations Act of 2020, N, Sec. 501.
  • Obamacare added I.R.C. §4980I to add a nondeductible excise tax on insurers when the aggregate value of employer-sponsored health insurance coverage for an employee, former employee, surviving spouse or other primary insured individual exceeded a threshold amount. This tax, referred to as a tax on “Cadillac” plans, is repealed for tax years beginning after 2019. Further Consolidated Appropriations Act of 2020, N Sec. 503.

Note:  The PCORI taxes on insured and self-insured plans, set to expire in 2019, were extended 10 years.

Retirement Provisions

The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) passed the house on May 23, but the Senate never took it up.  Nevertheless, the SECURE Act provisions did get included in the Omnibus legislation largely unmodified.  The legislation represents the first major retirement legislation since the Pension Protection Act of 2006.

Here are the key highlights of the SECURE Act:

  • An increase in the required minimum distribution (RMD) age for distributions from a traditional IRA from the year in which an individual turns 70.5 to the year the individual turns 72. This provision matches the existing rules for 401(k)s and Roth IRAs. The provision is applicable to persons that did not reach age 70.5 by the end of 2019. SECURE Act §114(a), amending I.R.C. §401(a)(9(C)(i)(I).    

Note:  Proposed Senate legislation would set the RMD at age 75.  There have also been some discussions among staffers of tax committees of exempting smaller IRA account balances from the RMD rule.  

  • The amount of a taxpayer’s qualified charitable distributions from an IRA direct to a qualified charity that are not includible in gross income for a tax year is reduced(but not below zero) by the excess of the total amount of IRA deductions allowed to the taxpayer for all tax years ending on or after the date the taxpayer attains age 70.5, over the total amount of reductions for all tax years preceding the current tax year.  SECURE Act §107(b), amending I.R.C. §408(d)(8)(A).  The provision is effective for contributions made for tax years beginning after 2019 and for distributions for tax years beginning after 2019. 
  • A repeal of the rule barring contributions to a traditional IRA by persons age 70.5 and up. There was no such rule that barred post-age 70.5 contributions to a Roth IRA.  SECURE Act §107(a), repealing I.R.C. §219(d)(1).
  • Part-time employees are allowed to contribute to a 401(k) plan. SECURE Act §112(a)(1), amending I.R.C. §412(k)(2)(D).  
  • The legislation provides a small employer pension plan start-up credit maximum set at the greater of $500, or the lesser of $250 for each employee of the eligible employer who is non-highly-compensated and who is eligible to participate in the plan or $5,000. Secure Act §104(a), amending I.R.C. §45E(b)(1). 
  • The new law expands the ability to run multiple employer plans and make the process easier overall by allowing small employers to band together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than presently exists. This provision is effective for plan years beginning after 2020.  SECURE Act §101, amending I.R.C. §413(e) and various portions of ERISA.
  • The legislation adds a new exemption from the 10 percent penalty of I.R.C. §72(t) for early withdrawals from a retirement account. Under the provision, a parent is allowed to withdraw up to $5,000 of funds penalty-free from a 401(k), IRA or other qualified retirement plan within a year of a child’s birth or the finalization of a child’s adoption.  The provision is applicable for distributions made after 2019.  SECURE Act §113, amending various I.R.C. sections. 
  • Under prior law, funds contained in IRAs (and qualified plans) that a non-spouse inherited IRA could be withdrawn over the beneficiary’s life expectancy. Now, so-called “stretch” IRAs are eliminated by virtue of requiring non-spouse IRA beneficiaries (except for a minor child of the IRA owner, chronically ill individual, or anyone who is not more than 10 years younger than the IRA owner) to withdraw funds from inherited accounts within 10 years. Estimates are that this provision will generate at least $15 billion in additional tax revenue in the first 10 years.  The provision is effective January 1, 2020.  SECURE Act, §401(a)(1), amending I.R.C. §401(a)(9)(E) and (H)(ii).  

Example:  Harold left his IRA to his 27-year-old grandson, Samuel.  Under prior law, Samuel could, based on his life expectancy, take distributions over 55 years.  If the amount in the IRA at the time of Harold’s death was $1 million, Samuel’s first-year distribution would be $18,182 ($1,000,000/55).  Depending on Samuel’s other income, the IRA income could be taxed at a rather low tax bracket rate or a high tax bracket rate.  The amount remaining in Samuel’s inherited IRA would continue to grow over Samuel’s lifetime.  Under the CAA, however, Samuel must take all distributions from the inherited IRA within 10 years of Harold’s death.  As a result, Samuel will likely be placed into a much higher tax bracket.  Harold could avoid this result, for example, by leaving the IRA to the Rural Law Program at Washburn University School of Law. 

The provision does make sense from a policy standpoint given that the U.S. Supreme Court has held that inherited IRAs are not retirement accounts.  Clark v. Rameker, 134 S. Ct. 2242 (U.S. 2014).  However, the potential for a higher tax burden placed on the beneficiary will require additional estate planning and strategic Roth conversions during the account owner’s lifetime.  Drafters of trust instruments should review existing trusts for clients that contain “pass-through” trusts to ensure conformity with the new rule.  For trusts that don’t conform to the new rules, access to funds by heirs of IRA beneficiaries could be restricted and tax obligations could be large.

The provision applies to all qualified plans such as 401(k), 403(b) and 457(b) plans.  It also applies to ESOPs, cash balance plans, 401(a) plans (defined contribution) as well as lump-sum distributions from defined benefit plans, and IRAs. However, it does not apply to a spousal rollover. When the owner dies, their spouse may roll over their spouse’s IRA into their own IRA.


The Congress allowed numerous tax provisions to expire at the end of 2017 and 2018.  The CAA addresses some of the expired provisions, restoring them retroactively and extending them through 2020.  Here’s a list of the more significant ones:

  • The provision excluding from income qualified principal residence debt that has been forgiven (up to $2 million; $1 million for married taxpayers filing separately) is restored for 2018 and 2019 and extended through 2020. R.C. §108(a)(1)(E as amended by §101(a) of the Disaster Act.  The provision also applies to qualified principal residence debt discharged via a binding written agreement entered into before 2021.  Disaster Act §101(b) amending I.R.C. §108(h)(2)
  • The deduction for mortgage insurance premiums is retroactively reinstated and extended through 2020. This provision is extended through 2020 for amounts paid or incurred after Dec. 31, 2017.  Disaster Act §102 amending I.R.C. §163(h)(3)(E)(iv)(l).   
  • The medical expense deduction floor is set at 7.5 percent for 2019 and 2020. Disaster Act §103, amending I.R.C. §213(f).
  • The tax code provision providing for a 3-year depreciation recovery period for race horses two years old or younger is extended for such horses placed in service before 2021. Disaster Act §114, amending I.R.C. §168(e)(3)(A)(i). 
  • The legislation restores the qualified tuition (and related expenses) deduction for 2018 and 2019 and extends it through 2020. Disaster Act §104, amending I.R.C. §222(e).
  • The work opportunity tax credit that employers can claim for hiring individuals from specific groups is extended through 2020. R.C. §51(c)(4), as amended by §143 of the Disaster Act. 
  • The employer tax credit for paid family and medical leave is extended through 2020. Disaster Act §142, amending I.R.C. §45S(i). 
  • The biodiesel fuel tax credit is extended through 2020. Disaster Act §121(a), amending I.R.C. §40A(g)
  • The tax credit for nonbusiness energy property (e.g., windows, doors, skylights, roofs, etc.) for personal residences is extended for tax years beginning after 2017 and before 2021. Disaster Act §123, amending I.R.C. §25C(g)(2). 
  • The tax credit for electricity produced from certain “renewable” resources is extended for qualified facilities constructed before January 1, 2021. Disaster Act §127(a), amending various subsections of I.R.C. §45(d).  For wind facilities the construction of which begins in calendar year 2020, the applicable credit is reduced by 40 percent. Disaster Act §127(c)(2)(A), amending I.R.C. §45(b)(5). 
  • The tax credit for manufacturers of energy-efficient residential homes is extended for homes acquired before January 1, 2021. Disaster Act §129, amending I.R.C. §45L(g). 

Other Provisions

The TCJA changed the rules for deducting losses associated with casualties and disasters.  The Disaster Act modifies those TCJA rules and provides that taxpayers impacted by a qualified disaster beginning January 1, 2018, and ending 60 days after the date of enactment, can make tax-favored withdrawals from retirement plans.  In addition, the modification provides for an automatic 60-day filing extension of all tax deadlines for those taxpayers affected by federally declared disasters that are declared after December 20, 2019. Disaster Act §205, amending I.R.C. §7508A,

The Disaster Act also modifies the contribution limits with respect to donations by businesses and individuals giving to provide relief to those affected by disasters.

The modification to the “kiddie-tax” contained in the Tax Cuts and Jobs Act (TCJA) is repealed effective January 1, 2020, but an election can be made to have the new rules apply to the 2018 and 2019 tax years.  This means that children’s unearned income will be taxed at their parents’ highest marginal tax rate rather than the rates applicable to trusts and estates, and the taxable income of a child attributable to earned income will be taxed under the rates for single individuals.  SECURE Act §501(a), amending I.R.C. §1(j)(4).   

What Wasn’t Addressed

There were several provisions in the TCJA that needed technical corrections.  Not the least of those was the need to clarify that qualified improvement property is 15-year property.  However, the nothing in the Omnibus legislation addresses this issue.  The Omnibus legislation also does not increase or repeal the $10,000 limit on deductions for state and local taxes for individuals.


The changes included in the various parts of the Omnibus legislation are significant, particularly with respect to the retirement provisions.  Most certainly, Roth IRAs will be an even more popular tax and retirement planning tool. 

A very merry Christmas to all!

December 24, 2019 in Estate Planning, Income Tax | Permalink | Comments (0)

Friday, December 20, 2019

2020 National Summer Ag Income Tax/Estate and Business Planning Seminar


Each summer for almost 15 years, I have conducted a national summer seminar at a choice location somewhere in the United States.  During some summers, there has been more than a single event.  But, with each event, the goal is to take agricultural tax, estate planning and business planning education and information out to practitioners in-person.  Over the years, I have met many practitioners that do a great job of representing agricultural producers and agribusinesses with difficult tax and estate/business/succession planning situations.  Because, ag tax and ag law is unique, the detailed work in preparing for those unique issues is always present.

The 2020 summer national ag tax and estate/business planning seminar – it’s the topic of today’s post.

Deadwood, South Dakota - July 20-21, 2020

Hold the date for the 2020 summer CLE/CPE seminar.  This coming summer’s event will be in Deadwood, South Dakota on July 20 and 21.  The event is sponsored by the Washburn University School of Law.  The Kansas State University Department of Agricultural Economics will be a co-sponsor.  The location is The Lodge at Deadwood.  The Lodge is relatively new, opening in 2009.  It is located just west of Deadwood on a bluff that overlooks the town.  You can learn more about The Lodge here:  The Lodge has great conference facilities and also contains the Deadwood Grille featuring Western dining.  For families with children, The Lodge contains an indoor water playland.  There is also transportation from The Lodge to Main street in Deadwood where the shops and local attractions are located.  Deadwood is in the Black Hills area of western South Dakota.  Nearby is Mt. Rushmore, Crazy Horse, Custer State Park and Rapid City.  The closest flight connection is via Rapid City.  To the west is Devil’s Tower in Wyoming.  The Deadwood area is a beautiful area, and the weather in late July should be fabulous. 

Featured Speakers

On Day 1, July 20, joining me on the program will be Paul Neiffer.  Paul has been doing the summer seminars with me for several years now and is affiliated with CliftonLarsonAllen, LLP.  We enjoy working together to provide the best in ag tax education that you can find.  Also, confirmed as a Day 1 speaker is the honorable Judge Elizabeth Paris of the U.S. Tax Court.  She will provide an informative session on litigating a case before the U.S. Tax Court and the special rules and procedures of the court.  Judge Paris has decided several important ag cases during her tenure on the court, and is a great speaker.  You won’t want to miss her session.

I will lead off Day 2 with coverage of the most recent ag-related cases and rulings impacted farm and ranch estate and business planning.  Also joining me on Day 2 will be Prof. Jeffrey Jackson, a colleague of mine at Washburn University School of Law.  He will present a session on gun trusts for holding firearms and the unique issues that passing firearms at death can present.  Prof. Jackson will discuss what a gun trust is and how it works, what it cannot do, and client counseling with respect to passage of firearms by gift or at death.

Also making a presentation on Day 2 will be Marc Vianello.  Marc is a CPA and the managing member of Vianello Forensic Consulting, LLC.  He is an experienced financial professional with and intensive 30-year history as a forensic accountant and expert witness regarding damages in highly complex litigation, including breach of contract, intellectual property (patent, Lanham, trade secret, copyright), business valuation, franchise, agriculture, Qui Tam and class action, personal injury, employment, casualties, financial crimes, and all other types of income and valuation damages. Marc also has an extensive background regarding the computation of estate and gift tax discounts for lack of marketability.  Marc’s presentation will focus on how practitioners can utilize forensic accounting techniques and expert testimony to bolster a client’s position against the IRS on audit as well as in court.

The Day 1 and Day 2 speakers and agenda aren’t fully completed yet, but the ones mentioned above are confirmed.  An ethics session may also be added.    


The two-day event will be broadcast live over the web.  The webcast will be handled by Glen McBeth, Instructional Technology at the Washburn Law School Law Library.  Glen has broadcast the last few summer seminars and does a tremendous job producing a high-quality webcast. 

Room Block

A room block at The Lodge will be established and you will be able to reserve your room as soon as the seminar brochure is finalized and registration is opened.  The room block will begin the weekend before the seminar begins so that you can arrive early and enjoy the weekend in Deadwood and the Black Hills area prior to the event if you’d like. 

Alumni Event

Washburn’s law school will also be holding an alumni event at The Lodge that corresponds with the summer seminar.  Presently, the plan is to have a social event for law school alumni and registrants of the summer seminar on Sunday evening, July 19.  That event will be followed the next day with a CLE seminar focusing on law and technology.  That CLE event will also be at The Lodge and will run simultaneously with Day 1 of the two-day summer seminar on July 20.  The summer seminar will continue on July 21.


If your business is interested in sponsoring a breakfast, break or lunch, and having vending space at the conference, please let me know.  It’s a great event to interact with practitioners that represent the legal and tax needs of farmers and ranchers from across the country that are involved in many aspects of agriculture.


Please hold the date for the July 20-21 conference and, for law school alumni (as well as registrants for the two-day event), the additional alumni reception and associated CLE event.  It looks to be an outstanding opportunity for specialized training in ag tax and estate/business planning. 

December 20, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Thursday, November 21, 2019

Co-Tenancy or Joint Tenancy – Does it Really Matter?


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 subject to tax. 

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 non-marital 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.

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 and 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 an 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. 


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.   

November 21, 2019 in Estate Planning, Real Property | Permalink | Comments (0)

Friday, November 8, 2019

Ag Law In The Courts


This month’s installment of legal developments in the courts involving agriculture features odors, estate planning and a farm program regulation. Farmers, ranchers, rural landowners and agribusinesses sometimes find themselves in disputes with other private parties or state or federal government agencies.  Once a month I try to feature a several developments that illustrate the problems that can arise and how they are resolved.

The November installment of ag law in the courts – that’s the focus of today’s post.

The Case of the Obnoxious Odors

Agricultural production operations and ag businesses sometimes produce offensive odors (at least to some).  While neighbors might complain and state and local governments may try to regulate, the question is really one of the relative degree of offensiveness.

In Chemsol, LLC, et al. v. City of Sibley, 386 F. Supp. 3d 1000 (N.D. Iowa 2019), the plaintiffs owned and operated a milk drying facility. Allegations arose that the facility made the local town, the defendant in the case, smell like “rotten eggs, dried blood, rotten animal carcasses (boiling, burning and decomposing), vomit, human waste and dead bodies.” The defendant enacted an odor ordinance in 2013 which prohibited the creation or maintenance of a nuisance," and defined nuisance to include "offensive smells.”  The ordinance barred the following:  “The erecting, continuing or using of any building or other place for the exercise of any trade, employment or manufacture which, by occasioning noxious exhalations, offensive smells or other annoyances, becomes injurious and dangerous to the health, comfort or property of individuals or the public.” In 2015 the town increased the penalties for violating the ordinance from $100 per offense to $750 for a "first offense," and $1,000 for repeated violations. In 2016, the ordinance was amended to clarify that: "[N]uisance" shall mean whatever is injurious to health, indecent, or unreasonably offensive to the senses, or an obstruction to the free use of property, so as essentially to interfere unreasonably with the comfortable enjoyment of life or property. *** Offensive Smells: The erecting, continuing or using of any building or other place for the exercise of any trade, employment or manufacture which, by occasioning unreasonably noxious exhalations, unreasonably offensive smells or other unreasonable annoyances, becomes injurious and dangerous to the health, comfort or property of individuals or the public.” (emphasis added).

From 2012 to 2016 the plaintiffs did not receive any citations under the odor ordinance. In 2016 the plaintiffs began receiving citations but didn’t pay or appeal the associated fines. Abatement of the nuisance was negotiated, but the odors problems persisted. The plaintiffs received 36 citations in 2016 (16 before the abatement hearing and 20 after), four citations in 2017 and one citation in 2018. The plaintiffs chose to reduce odors by drying less product. The plaintiffs sued on the basis that the ordinance violated their due process by causing them to lose business and become unable to sell the business due to bad publicity. The plaintiffs also alleged a constitutional taking had occurred and that the town had tortuously interfered with business operations. The defendant moved for summary judgment and the court agreed.

The court noted that the plaintiffs did not build the plant on any promise or assurance that the defendant would not be enact such an ordinance, and it was within the defendant’s jurisdiction to enact such an ordinance for a facility within the defendant’s limits. The court also determined that the ordinance did not rise to a regulatory taking because economic use of the plaintiffs’ property remained. The court also concluded that the defendant did not act improperly in enforcing the ordinance or in speaking to potential buyers. 

The Case of Crop Insurance Coverage Computation

Under the crop insurance program of the 2014 Farm Bill, crop insurance coverage for low yield losses was to be determined based on actual production history (APH). However, APH is determined by excluding abnormally low-yield years in the computation.  In this case, JL Farms v. Vilsack, No. 2:16-cv-02548-CM-GEB, 2019 U.S. Dist. LEXIS 106789 (D. Kan. Jun. 26, 2019), the Risk Management Agency (RMA) determined that the 2015 winter wheat crop was not excludible from the APH. Thus, the insurer did not exclude the 2015 yield data from the plaintiff’s insurance pay-out computation.

On review by the National Appeals Division ("NAD") of the United States Department of Agriculture. The NAD hearing officer determined that the NAD lacked jurisdiction. On further review the NAD Director again determined that the NAD did not have jurisdiction, but that the RMA had discretion to implement the exclusion. The plaintiff then sought judicial review of the RMA’s decision and the NAD Director’s decision of lack of jurisdiction. The trial court determined that the NAD did have jurisdiction over the matter and remanded the matter to the NAD Director for reconsideration of the exclusion of the 2015 wheat crop from the plaintiff’s APH. The trial court also referenced a recent decision by the U.S. Court of Appeals for the 10th Circuit holding that the Congress intended the exclusion to be available for the 2015 crop year (winter wheat planted in 2014). 

The Ruling on the Reformed Trust

Trusts are very popular tools that are used in estate planning.  One of the key benefits is that they provide a great deal of flexibility to adjust to unknown events that might occur in the future.  One way in which that is done is by including a power of appointment in a trust.  A power of appointment gives the holder of the power the ability to direct the assets of the trust in a certain manner and in a certain amount.  Essentially, the power of appointment gives the person that creates the power in someone else the ability to determine how the property will be distributed at some point in the future.  Basically, the power creates the ability to defer deciding the ultimate distribution of trust assets.  For example, assume that a husband dies and leaves property in trust for his surviving wife and their children.  When the surviving spouse dies, the trust specifies that the remaining trust assets are to pass equally to the children, unless the surviving spouse exercises the power of appointment that was included in the husband’s trust.  At the time of the husband’s death, $2 million worth of assets was included in the trust and the couple had two children, each equally situated in life.  However, when the surviving spouse dies years later, perhaps the children aren’t so equally positioned anymore – one is rather well off and the other is struggling.  The exercise of the power of appointment can give the surviving spouse the ability to “unbalance” the disposition of the trust assets and leave more assets to the child with greater needs. 

A general power of appointment is one that is exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate.  I.R.C. §2041(b)(1). It also means a power that is exercisable in favor of the individual possessing the power, his estate, his creditors, or the creditors of his estate.  I.R.C. §2514(c). Generally, the lapse of a power of appointment during the life of the individual who has the power of appointment is a release of the power.  I.R.C. §2041(b)(2)But, this rule only applies to a lapse of powers during any calendar year to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded the greater of $5,000 or 5% of the aggregate value of the assets out of which the exercise of the lapsed powers could have been satisfied.  I.R.C. §§2041(b)(2); 2514(e).  In addition, generally the exercise or release of a general power of appointment is a transfer of property by the individual possessing such power.  I.R.C. §2514(c).  When that occurs, it can result in a taxable gift to the trust and/or inclusion of the assets in the power holder’s estate.  If large dollar values are involved, that can be a disastrous result.

A recent IRS ruling involved a trust that contained a general power of appointment that had been drafted incorrectly.  The question was whether that error could be corrected without triggering gift tax or causing the property to be included in the power holder’s estate.  In Priv. Ltr. Rul. 201941023 (May 29, 2019), the settlor created an irrevocable trust for the benefit of his six children. The purpose of the trust was to provide for his descendants and reduce transfer taxes by keeping trust assets from being included in a primary beneficiary’s gross estate. Under the trust terms, each child had his or her own separate trust (collectively, Children’s Trusts; individually, Child’s Trust). Each child was the primary beneficiary of his or her Child’s Trust.

Unfortunately, the trust had a drafting error pertaining to the withdrawal provision – it didn’t limit the general power of withdrawal right of a primary beneficiary over assets contributed to the trust to the greater of $5,000 or five percent of the value of the trust assets as I.R.C. §2041(b)(2) required. Thus, any lapse of a primary beneficiary’s withdrawal right would be a taxable transfer by that particular primary beneficiary under I.R.C. §2514 to the extent that the property that could have been withdrawn exceeded the greater of $5,000 or five percent of the aggregate value of the assets. Also, the portion of each child’s trust relating to the lapsed withdrawal right that exceeded the greater of $5,000 or five percent of trust asset value would be included in the primary beneficiary’s estate.

A subsequent estate planning attorney discovered the error in the original drafting upon review of the estate plan. Consequently, the trustee sought judicial reformation to correct the drafting error on a retroactive basis, and the court issued such an order contingent on the IRS favorably ruling. The IRS did favorably rule that the reformation didn’t cause the release of a general power of appointment with respect to any primary beneficiary. The purpose of the reformation, the IRS determined, was to correct a scrivenor’s error and did not alter or modify the trust in any other manner.  That meant that none of the children would be deemed to have released a general power of appointment by reason of the lapse of a withdrawal right that they held with respect to any transfer to their trust.  Thus, no child would be deemed to have made a taxable gift to their trust and no part of any child’s trust would be included in any child’s estate. 

Perhaps there is a “kindler and gentler” IRS after all – at least on this point. 


These are just a small snippet of what’s been going on in the courts and IRS recently that can impact agricultural producers and others involved in agriculture.  Each day brings something new. 

November 8, 2019 in Civil Liabilities, Estate Planning, Insurance | Permalink | Comments (0)

Monday, October 7, 2019

The Importance of Income Tax Basis “Step-Up” At Death


2013 marked the beginning of major law changes impacting estate planning.  Those changes were continued and, in some instances, enhanced by the Tax Cuts and Jobs Act (TCJA) enacted in late 2017.  In particular, the “applicable exclusion amount” was enhanced such that (for deaths in 2019) the associated credit offsets the first $11.4 million in taxable estate value (or taxable gifts).  Consequently, the vast majority of estates are not impacted by the federal estate tax.  The “stepped-up” basis rule was also retainedI.R.C. §1014.  Under that rule, property included in the estate at death gets an income tax basis in the hands of the heirs equal to the property’s fair market value (known as “stepped-up” basis).  Much estate planning now emphasis techniques to cause property inclusion in a decedent’s estate at death to get the basis increase. 

What are the planning steps to achieve a basis increase?  What about community property?  These are the issues addressed in today’s post.

Basis “Step-Up” Considerations – First Things First

As noted above, under present law, the vast majority of estates do not face federal estate tax at death.  Thus, obtaining a basis increase for assets included in the gross estate is typically viewed as more important.  Consequently, an initial estate planning step often involves a comparison of the potential transfer tax costs with the income tax savings that would arise from a “step-up” in basis.  Unfortunately, this is not a precise science because the applicable exclusion adjusts be for inflation or deflation and could change dramatically depending on the whim of politicians. 

It’s also important to note that a basis increase is of no tax help to the owner of the property that dies.  The only way to capture the income tax benefits of the stepped-up basis adjustment is for the recipients of those assets to dispose of them in a taxable transaction. The degree of the benefit is tied to the asset.  Farm and ranch land may never be sold or may only be sold in the very distant future.  A basis adjustment at death is also beneficial if the asset involved is depreciable or subject to depletion.  An additional consideration is whether the asset involved is an interest in a pass-through entity such as a partnership or an S corporation.

Exceptions To “Stepped-Up” Basis

There are exceptions to the general rule of date- of-death basis.  For example, if the estate executor elects alternate valuation under I.R.C. §2032, basis is established as of the alternate valuation date (typically six months after death).  Also, if the estate executor elects special use valuation under I.R.C. §2032A, the lower agricultural use value of the elected property as reported on the federal estate tax return establishes the basis in the hands of the heirs.  For deaths in 2019, the maximum statutory value reduction for elected land is $1,160,000. 

In addition, for land subject to a qualified conservation easement that is excluded from the gross estate under I.R.C. §2031(c), a “carryover” basis applies to the property.  Also not receiving a basis increase at death is property that constitutes income in respect of a decedent (such as unrecognized interest on U.S. savings bonds, accounts receivable for cash basis taxpayers, qualified retirement plan assets, and IRAs, among other things).  There’s also a special basis rule that involves appreciated property that was gifted to the decedent within one year of death, where the decedent transferred the property back to the original donor of such property (or the spouse of the donor).  The donor receiving the property back will take as a basis the basis that the decedent had in the property immediately before the date of death. I.R.C. §1014(e).  The property basis won’t step-up to fair market value at the date of the decedent’s death.

Community Property Considerations 

The advantage of community property.  On the basis step-up issue, estates of persons living in community property states have an advantage over estates of persons domiciled in separate (common law) property states.  Under community property law, all assets acquired during marriage by either spouse, except gifts, inheritances, and assets acquired with separate property, are considered to be owned equally by the spouses in undivided interests.  The title of an asset is not definitive in terms of ownership in community property states like it is in common law states. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. 

The ownership portion of the couple’s community property that is attributable to the surviving spouse by virtue of I.R.C. §1014(b)(6) gets a new basis when the first spouse dies if at least one-half of the community property is included in the decedent’s estate for federal estate tax purposes.  This became the rule for deaths after 1947.  Restated differently, there is a basis adjustment of both the decedent’s and surviving spouse’s one-half of community property at death if at least one-half of the community property was included in the decedent’s gross estate under the federal estate tax rules – which would normally be the result.  The federal tax law considers the surviving spouse’s share to have come from the decedent.  The result is a 100 percent step-up in the basis of the property.  Conversely, in a common law property state, property that one spouse owns outright at death along with only 50 percent of jointly owned property is included in the estate of the first spouse to die (and receives a basis adjustment) unless the rule of Gallenstein v. Comr., 975 F.2d 286 (6th Cir. 1992) applies to provide a 100 percent basis step-up for property acquired before 1977.   

Community property spousal trusts.  Three common law property states, Alaska, South Dakota and Tennessee, authorize the creation of “community property trusts” for married couples that establish via the trust an elective community property system.  See, Alaska Stat. Ann. §34.77.100; Tenn. Code Ann. Ch. 35-17-101 – 35-17-108; S.D. Cod. Laws. Ch. 55-17-1 – 55-17-14.   In these states, married couples can classify property as community property by transferring the property to a qualifying trust.  

Under the Alaska provision (enacted in 1998), at least one trustee must be an individual who resides in Alaska or a trust company or bank with its principal place of business in Alaska.  The trust is irrevocable unless it provides for amendment or revocation.  Certain disclosures must be made for the trust to be valid, and the trust must contain specific language declaring that the property contained in the trust is to be community property.  Resident married couples can also execute an agreement to create community property for property that is not held in trust.

The Tennessee provision was enacted in 2010 and allows married couples to convert their property to community property by means of a “Community Property Trust.”  Again, the idea of the trust is to achieve a 100 percent basis step-up for all of the trust property at the death of the first spouse.  Comparable to the Alaska provision, at least one trustee must be an individual that resides in Tennessee or a company that is authorized to act as a fiduciary in Tennessee.   

Under the South Dakota law (enacted in 2016), property contained in “South Dakota Spousal Trust” is considered to be community property even if one spouse contributed more than 50 percent of the property to the trust.  At least one trustee must be a South Dakota resident, which could be one of the spouses.  S.D. Cod. Laws §§55-17-1; 55-3-41.  The trust must state that the trust property is intended to be community property and must specify that South Dakota law applies.  S.D. Cod. Laws §55-17-3.  Both spouses must sign the trust.  S.D. Cod. Laws §55-17-1.  Nonresidents can also utilize such a trust if a trustee is a qualified person that resides in South Dakota.  In addition, significant disclosures are required between the spouses and both must consent and execute the trust.  S.D. Cod. Laws §§55-17-11; 55-17-12.  The trust can be either revocable or irrevocable if the trust language allows for amendment or revocation.  S.D. Cod. Laws. §55-17-4. 

Transfer of farmland.  Can farmland that is owned in joint-tenancy, tenancy-by-the-entirety, or co-tenancy in a common law property state be transferred to a Community Property Trust created under the laws of these states and be treated as community property in order to achieve a full stepped-up basis at the death of the first spouse?  Normally the law of “situs” (e.g. the location of where land is located) governs the legal status of the land transferred to a trust that is administered in another state.  Neither the Alaska, South Dakota, nor Tennessee laws clearly address the legal nature of farmland that is transferred to such a trust from a common law property state, and there appears to be no caselaw or IRS rulings that address the question.  Thus, a preferable planning approach might be to transfer the out-of-state farmland to an entity such as a limited liability company or family limited partnership followed by a transfer of the interests in the entity to the trust.  Perhaps doing so would avoid questions concerning the property law and income tax basis issues associated with the out-of-state farmland.

The UDCPRDA.  Presently, sixteen states (Alaska; Arkansas; Colorado; Connecticut; Florida; Hawaii; Kentucky; Michigan; Minnesota; Montana; New York; North Carolina; Oregon; Utah; Virginia and Wyoming) have enacted the Uniform Disposition of Community Property Rights at Death Act (“UDCPRDA”).  The UDCPRDA specifies how property that was acquired while the spouses resided in a community property state passes at death if the spouses then reside in a common law property state.  The UDCPRDA preserves the community property nature of the property, unless the couple has taken some action to sever community property rights.  It does so by specifying that upon the death of the first spouse, one-half of the community property is considered the property of the surviving spouse and the other half is considered to belong to the deceased spouse.  This should achieve a full basis step-up due to the unlimited marital deduction of I.R.C. §2056, however there aren’t any cases or IRS rulings on the impact of the UDCPRDA on basis step-up under I.R.C. §1014(b)(6).

Other Techniques

The disparate treatment of community and common law property under I.R.C. §1014 has incentivized estate planners to come up with techniques designed to achieve a basis “step up” for the surviving spouse’s common law property at the death of the first spouse.

One way to achieve the basis increase is to give each spouse a power of appointment over the other spouse’s property which causes, on the death of the first spouse, the deceased’s spouse’s property to be included in the decedent’s estate by virtue of I.R.C. §2033 (if owned outright) and I.R.C.§2038 if owned in a revocable trust.  The surviving spouse’s property would also be included in the decedent’s estate by virtue of I.R.C. §2041. The power held by the first spouse to die terminates upon the first spouse’s death and would be deemed to have passed at that time to the surviving spouse.

Another technique involves the use of a joint exempt step-up trust (JEST).  In essence, both spouses contribute their property to the JEST that holds the assets as a common fund for the benefit of both spouses. Either spouse may terminate the trust while both are living, with the result that the trustee distributes half of the assets back to each spouse. If there is no termination, the joint trust becomes irrevocable upon the first spouse’s death. Upon the first spouse’s death, all assets are included in that spouse’s estate.  Upon the first spouse’s death, assets equal in value to the first spouse’s unused exclusion will be used to fund a bypass trust for the benefit of the surviving spouse and descendants. These assets will receive a stepped-up basis and will not be included in the surviving spouse’s estate.  Any asset in excess of the funding of the bypass trust will go into an electing qualified terminable interest property (QTIP) trust under I.R.C. §2056(b)(7).  If the first spouse’s share of the trust is less than the available exclusion, then the surviving spouse’s share will be used to fund a bypass credit shelter trust.  These assets will avoid estate taxation at the surviving spouse’s death.

The JEST technique comes with caution.  Because the surviving spouse (the donor) could revoke the joint revocable living trust at any time, the surviving spouse arguably has dominion and control over the trust assets during the year before and up to the time of the decedent spouse’s death.  That could mean that I.R.C. §1014(e) applies to disallow a basis increase in the surviving spouse’s one-half interest in the trust due to retained control over the trust assets within a year of death.  See, Priv. Ltr. Ruls. 9308002 (Nov. 16, 1992) and 200101021 (Oct. 2, 2000). 


For the vast majority of people, avoiding federal estate tax at death is not a concern.  Some states, however, do tax transfers at death and the exemption in those states is often much lower than the federal exemption.  But, achieving an income tax basis at death is of primary importance to many people.  Community property has an advantage on this point, and other planning steps might be available to receive a full basis step-up at death.  In any event, estate and income tax basis planning is a complex process for many people, especially those with farms and ranches and other small businesses that are trying to make a successful transition to the next generation.  Competent legal and tax counsel is a must.

October 7, 2019 in Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, October 1, 2019

Issues in Estate Planning – Agents, Promises and Trustees


When one thinks of estate planning, visions of wills and/or trusts come to mind and maybe even a power of attorney for financial and health care decisions.  Those are the standard documents.  If a spouse is also involved in the process, then the coordination of the language in the documents for each spouse is also critical to ensure that the couple’s property passes as desired after the last of them dies.

But, beyond the basic documents and coordinated planning, there are numerous legal issues that can arise.  Those can include issues associated with someone else acting on one’s behalf; promises to pass property at death; and the process for replacing a trustee of a trust.  Some recent court cases dive into each of these issues.

Legal issues arising during the estate planning process – it’s the topic of today’s post.

Signing Documents On Behalf Of Someone Else

In In re Estate of Moore, No. 115,628, 2019 Kan. LEXIS 321 (Kan. Sup. Ct. Sept. 6, 2019), the decedent appointed the defendant (her ex-daughter in law) as her power of attorney. The plaintiff (the decedent’s son) had a long history of poor financial decisions, including losing 440 acres that the decedent pledged as security for him. More than $100,000 of the decedent’s money was lent or just straight up taken out of her accounts by the plaintiff. An attorney was hired to keep the plaintiff from obtaining the decedent’s “homeplace.” A transfer on death deed was created to move the property to the defendant so that it could later be transferred to the decedent’s grandsons (the children of both parties).

In May of 2004 the deed was read to the decedent, and the legal description was double checked. One of the grandsons asked if that decedent wanted them to have the property, which she answered “yes.”  In the presence of five witnesses the decedent asked the defendant to sign for her. The deed was notarized and filed. The decedent died on September 15, 2009. On November 7, 2012, the defendant executed a warranty deed conveying the homeplace to the grandsons. In 2014 the plaintiff filed petition for determination of descent asserting that the homeplace should have been in the estate. The grandsons countered that the property passed to them by transfer on death deed and was not in the estate.

The trial court initially found for the plaintiff based on the fact that the defendant could not benefit herself with that right. The defendant filed a motion to reconsider and claimed that the she did not sign the deed with her power of attorney but as an amanuensis – at the direction or dictation of someone else. The trial court agreed as did the appellate court. On further review, the state Supreme Court also agreed. The plaintiff challenged the validity of the signature by amanuensis noting that the defendant signed the transfer on death for the decedent and the added "by Maureen Miles, Power of Atty." The Supreme Court noted that state (KS) common law recognizes as valid a signature made by a person at the direction of someone else. The Court noted that the evidence was clear that the deed was properly signed by amanuensis. There were six witnesses that testified that the decedent asked the defendant to sign the deed for her. The plaintiff failed to present evidence to the contrary. The Court also rejected the plaintiff’s claim that the signature was not properly acknowledged. The deed was notarized after the defendant signed it for the decedent. The notary attached a notation indicating this intricacy. The deed was filed 3 days later. The deed conformed to state law by being signed; designating a beneficiary; acknowledged by a notary; and recorded in the office of the register of deeds prior to the decedent’s death. The Court found the deed signed by amanuensis to be proper even though the notary acknowledged the defendant’s power of attorney. The Court also rejected the plaintiff’s undue influence claim by concluding that the plaintiff failed to rebut the presumption that the decedent was competent in accordance with the general competency test for testamentary capacity. The decedent had strong motivations to ensure that the plaintiff did not receive her property, and the defendant transferred the property to the decedent’s grandsons before the litigation and did not benefit from the transaction. 

Promises, Promises...

In a recent Idaho Supreme Court decision, Turcott v. Estate of Bates, 443 P.3d 197 (Idaho 2019), the Court dealt with the legal force of an apparent promise not to change a will before death.  Under the facts of the case, in the late 1990’s the decedent executed a will devising the decedent’s farm to the decedent’s daughter and son equally. From 2007 until 2014 the daughter and her husband moved to the farm. They built a home on the farm and spent a lot of time and money maintaining the farm. In 2014, the decedent remarried and revoked the will. The decedent then placed the farm in a trust listing his new wife and himself as beneficiaries. The new will stated, "I purposefully have excluded my daughter as a devisee of my estate and my daughter shall take nothing from my estate." In 2016, the daughter sought to enforce the validity of the first will based on a promise that the will would not be changed or revoked before death. The trial court dismissed the plaintiff’s claim for the alleged promise to maintain the will. The plaintiff then filed an amended petitioner seeking quantum meruit damages for the work the plaintiff performed on the farm. The trial court awarded the plaintiff $136,402.50 in damages for unjust enrichment, but the plaintiff appealed on the basis that the amount was too low. On further review, the appellate court affirmed and did not award attorney fees because the appeal was not frivolous. 

How Long Does a Trustee Serve?

In Waldron v. Suasan R. Winking Trust, No. 12-18-00026-CV, 2019 Tex. App. LEXIS 5867 (Tex. Ct. App. Jul. 10, 2019), the plaintiff was the beneficiary of a trust that her parents created. The appointed trustee of the trust resigned and the appointed successor trustee (a bank) refused to serve as trustee. The trust instrument specified that if the successor trustee failed to serve that any bank or trust company could be appointed trustee by the serving of written notice signed by the grantor. However, the plaintiff could not find a bank or trust company willing to serve as trustee, so the plaintiff filed an action seeking to have an individual appointed as trustee. The trial court made such an appointment.

The plaintiff later filed an action to be appointed trustee due to improper conduct of the individual that had been appointed as trustee. That individual did not object to being removed as trustee upon appointment of another qualified trustee. The plaintiff subsequently sought to have another person appointed as trustee. This eventually happened, but the plaintiff asserted that the trial court ignored the trust language allowing for immediate termination of the trustee without cause by written letter if both grantors were legally disabled or deceased. Immediate termination would have saved the plaintiff from paying additional expenses for professional serviced.  The appellate court noted that the trust language did not provide a procedure for appointing a successor trustee when a bank or trust company could not be found to serve. Thus state (TX) law applied and left the decision of a successor trustee up to the court. State law also specified that an existing trustee’s fiduciary duties were not discharged until the trustee had been replaced by a successor trustee. As a result, the appellate court affirmed the trial court’s decision. 


Estate planning is a complex process in many situations.  Precision of drafting language is critical, but it depends on client clarity as to goals and objectives and attention to changes in applicable law.  Even then, however, landmines may still exist.  This is why “boilerplate” language and “boilerplate” forms printed off the web can be dangerous to use.  Get and keep good estate planning counsel.

October 1, 2019 in Estate Planning | Permalink | Comments (0)

Friday, July 19, 2019

ESOPs and Ag Businesses – Part One

What Is An ESOP?

In existence since the 1970s, an employee stock ownership plan (ESOP) is a type of qualified retirement plan that is designed to provide employees with ownership in the company by investing (primarily) in shares of stock of the employer-company.  According to data from the National Center for Employee Ownership, there are about 7,000 ESOPs in the United States covering approximately 14 million employees.    

Does an ESOP work for employees of a farming/ranching operation or an agribusiness?  In part one of a two-part series, today’s post lays out the basics of an ESOP – how it’s established and the potential benefits.   In part two next week I will examine potential problem areas as well as how the new tax law (as of the beginning of 2018) impacts the use of an ESOP.

ESOPs in agriculture – it’s the topic of today’s blog post. 

General Structure

An ESOP involves employee ownership of the business.  There are several ways that an employee can obtain ownership in the business.  One is to buy stock in the company.  Other ways involve an employee being gifted stock, receiving stock as a bonus or obtaining it via a profit-sharing plan.  But, the most common way for an employee to obtain ownership in the business is by use of an ESOP. 

In the typical ESOP transaction, the company establishes the plan by means of a trust fund – an “employee benefit trust” (hopefully with competent tax and legal counsel) and appoints an ESOP trustee.  The trustee then negotiates with a selling shareholder to establish the terms of the sale of the shareholder’s stock to the ESOP.  The company borrows the necessary funds from a third-party lender on the ESOP’s behalf and loans the funds to the ESOP which uses the funds to buy the stock from the selling shareholder with the seller receiving cash and taking a note for the balance.  The company will make annual (tax-deductible) contributions of cash to the ESOP which the ESOP uses to repay the inside loan.  The company uses the payment received from the ESOP to make payments on the third-party loan. 

An alternative approach is for the company to have the trust borrow money to buy stock with the company making contributions to the plan so that the loan can be paid back.  Unlike other retirement plans, an ESOP can borrow money to buy stock.  Consequently, an ESOP can buy large percentages of the company in a single transaction and repay the loan over time using company contributions.      The trustee is appointed by the company’s board of directors to manage the trust and can be an officer or other corporate insider.  Alternatively, the trustee can be an independent person that is not connected to the corporation as an officer or otherwise.  It is advisable that an external trustee be used to negotiate the terms and execute the transaction involving the purchase of shares of stock from a selling shareholder.   The trustee has the right to vote the shares acting in a fiduciary capacity.  However, the ESOP may require that certain major corporate transactions (i.e., mergers, reorganizations, and significant asset sales) involve the participation of ESOP participants in terms of instructing the trustee with respect to voting the stock shares that are allocated to their accounts.  I.R.C. §409(e)(3).  ESOP participants do not actually own the shares, the trust does.  Thus, an ESOP participant has only the right to see the share price and number of shares allocated to their account on an annual basis.  They have no right to see any internal financial statements of the company. 

The ESOP shares are part of the employees’ remuneration.  The shares are held in the ESOP trust until an employee either retires or otherwise parts from the company.  The trust is funded by employer contributions of cash (to buy company stock) or the contributions of company shares directly.

Retirement Plan Characteristics

An ESOP is a qualified retirement plan that is regulated by I.R.C. §4975(e)(7) as a defined contribution plan.  As such, ESOPs are regulated by ERISA which sets minimum standards for investment plans in private industry.  Only corporations can sponsor an ESOP, but it is possible to have non-corporate entities participate in an ESOP.  An ESOP must include all full-time employees over age 21 in the plan and must base stock allocations on relative pay up to $265,000 (2016 level) or use some type of level formula.  ESOPs are provided enhanced contribution limits, which may include the amount applied to the repayment of the principal of a loan incurred for the purposes of acquiring employer securities.  Employers are allowed to deduct up to an additional 25 percent of the compensation paid or accrued during the year to the employees in the plan as long as the contributions are used to repay principal payments on an ESOP loan. I.R.C. §404(a)(9)(A). 

In addition, an employer with an ESOP may deduct up to another 25 percent of compensation paid or accrued to another defined benefit contribution plan under the general rule of I.R.C. §404(a)(3).

 In addition, contributions made to the ESOP applied to the repayment of interest on a loan incurred for the purpose of acquiring qualifying employer securities are also deductible, even though in excess of the 25 percent limit. I.R.C. §404(a)(9)(B).  But, these two provisions, do not apply to an S corporation. I.R.C. §404(a)(9)(C). As a qualified retirement plan, an ESOP must satisfy I.R.C. §401(a) to maintain its tax-exempt status.  While an ESOP is not subject to the normal ERISA rules on investment diversification, the fiduciary has a duty to ensure that the plan’s investments are prudent. In addition to basic fiduciary duties designed to address the concern of an ESOP concentrating retirement assets in company stock, it is not uncommon for a company with an ESOP to also have a secondary retirement plan for employees.

What Happens Upon Retirement or Cessation of Employment?

When one the employee retires or otherwise parts from the company, the company either buys the shares back and redistributes them or voids the shares.  An ESOP participant is entitled to a distribution of their account upon retirement or other termination of employment, but there can be some contingencies that might apply to delay the distribution beyond the normal distribution time of no later than the end of the plan year.  For plan participants that terminate employment before normal retirement age, distributions must start within six years after the plan year when employment ended, and the company can pay out the distributions in installments over five years, with interest.  If employment ceased due to death, disability or retirement, the distribution must start during the plan year after the plan year in which the termination event occurred, unless elected otherwise.  If the ESOP borrowed money to purchase employer securities, and is still repaying the loan, distributions to terminating employees are delayed until the plan year after the plan year in which the loan is repaid.  In addition, no guarantee is made that the ESOP will contain funds at the time distributions are required to begin to make the expected distributions.

What Are The Benefits of an ESOP?

For C corporations with ESOPS, the selling shareholder avoids the “double tax” inherent in asset sales because the sale is a stock sale.  As such, gain can be potentially deferred on the sale of the stock to the ESOP. To achieve successful deferral, the technical requirements of I.R.C. §1042 must be satisfied and the ESOP, after the sale, must own 30 percent or more of the outstanding stock of the company and the seller must reinvest the sale proceeds into qualified replacement property (essentially, other securities) during the period beginning three months before the sale and ending 12 months after the sale.  If the replacement property is held until the shareholder’s death, the gain on the sale of the stock to the ESOP may permanently avoid tax. 

Corporate contributions to the ESOP are deductible if the contributions are used to buy the shares of a selling shareholder.  As a result, an ESOP can be a less costly means of acquiring a selling shareholder’s stock than would be a redemption of that stock.  Also, the ESOP does not pay tax on its share of the corporate earnings if the corporation is an S corporation. Thus, an S corporation ESOP is not subject to federal income tax, but the S corporation employees will pay tax on any distributions they receive that carry out the resulting gains in their stock value.

From a business succession/transition standpoint, an ESOP does provide a market for closely-held corporate stock that would otherwise have to be sold at a discount to reflect lack-of marketability of the stock, although the lack of marketability must be considered in valuing the stock.  Indeed, one of the requirements that an ESOP must satisfy is that it must allow the participants to buy back their shares when they leave the company (a “repurchase obligation”).     

Compared to a traditional 401(k) retirement plan, ESOP company contribution rates tend to be higher, and ESOPS tend to be less volatile and have better rates of return.   


In part two next week, I will look at the potential drawbacks of an ESOP and why the U.S. Department of Labor (DOL) gets concerned about them.  That discussion will include a recent DOL ESOP investigation involving a major ag operation. It will also involve a look at how the Tax Cuts and Jobs Act impacts ESOPs. 

July 19, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, July 3, 2019

Summer Tax and Estate Planning Seminar!


On August 13-14 Washburn University School of Law along with co-sponsors Kansas State University Department of Agricultural Economics and WealthCounsel, LLC will be conducting the 2019 National Summer Farm Income Tax/Estate and Business Planning Conference in Steamboat Springs, CO. This is a great opportunity for practitioners with agricultural clients as well as agricultural producers to get two days of in-depth education/training on issues that impact the agricultural sector.

The Steamboat Springs seminar, it’s the topic of today’s post.

Speakers and Agenda

This is the 15th summer that I have been conducting a national event, with that first one held in beautiful Ely, Minnesota.  Sometimes there is more than one during the summer, with the event usually held at a very nice location so that attendees can enjoy the area with their families if they choose to do so.   This summer is no exception.  Steamboat Springs is a lovely place on the western side of the Rocky Mountain National Park.

The speakers this year in addition to myself are Paul Neiffer, Stan Miller and Timothy O’Sullivan.  Paul has taught with me for several years at this event (and others) and many of you are familiar with him.  Stan is a partner in a law firm in Little Rock, Arkansas and the founder of WealthCounsel, LLC.  Stan will be speaking on the second day and will be addressing the necessary planning steps to assist farm and ranch families keep the business going into the future.  Also, on the Day 2, Tim O’Sullivan will provide the key details on long-term care planning, and dealing with family disharmony and its impact on the tax and estate planning/business succession planning process.  Tim has an extensive estate planning practice with Foulston Siefkin, LLP in Wichita, Kansas.  He is particularly focused and has expertise in the areas of Elder Law and Trusts and Estates. 

On the first day, Paul and myself will go through the current, key farm income tax issues.  Of course, the I.R.C. §199A deduction will be a big topic.  Just a couple of weeks ago, the Treasury released the draft proposed regulations on how the deduction applies in the context of agricultural/horticultural cooperatives and patrons.  We will take a deep dive into that topic, for sure.  Many questions remain.  We will also numerous other topics and provide insight into discussions in D.C. on specific issues and the legislative front.  It will be a full day. 

You can see the full agenda here:


The event will be held at the beautiful Steamboat Grand Hotel.  A roomblock is established for the conference.  Information on the hotel can be found here: For those brining families, there are many sights to see and places to visit in the town and the surrounding area. 


You can register for both days or just a single day.  Also, the conference is live streamed in the event you are not able to attend in person.  Just click on the conference link provided above to learn more.  You can register here:

Additional Opportunity

On Monday, August 12 I will be participating in another conference at the Steamboat Grand Hotel focusing on conservation easements.  That event is sponsored by several land trusts.  Contact me personally about that conference if you are interested in learning more.


I hope to see you in Steamboat Springs next month!  If you can’t attend in person, we trust you will benefit from watching the live presentation online.

July 3, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, June 25, 2019

Wayfair Does Not Mean That a State Can Always Tax a Trust Beneficiary



Last year, the U.S. Supreme Court decided South Dakota v. Wayfair, 138 S. Ct. 2080 (2018), upholding South Dakota’s ability to collect taxes from online sales by sellers with no physical presence in the state.  That decision was the latest development in the Court’s 50 years of precedent on the issue.  Based on that opinion, some states with an income tax took an aggressive stance against trust beneficiaries residing in their states.  These states claimed that Wayfair meant that the mere presence in the state of a trust beneficiary allowed the state to tax the beneficiary’s trust income.  North Carolina was one of those states.

The Supreme Court unanimously rejected North Carolina’s position.  In so holding, the Court outlined Due Process limitations that apply to a state’s ability to tax. 

The limitations on a state’s taxing authority – that’s the topic of today’s post.

The “Nexus” Requirement

In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court ruled that a state tax would be upheld if it applied to an activity having a substantial nexus with the state; was fairly apportioned; did not discriminate against interstate commerce; and, was fairly related to the services that the state provided.  Later, in Quill Corporation v. North Dakota, 504, U.S. 298 (1992), the Court determined that a physical presence in the taxing jurisdiction was what satisfied the Brady “substantial nexus” requirement. 

In Wayfair, the Court determined that a “substantial nexus” could be present without the party subjected to tax having a physical presence in the taxing jurisdiction.  That’s what got North Carolina (and some other states) excited – the ability to tax trust income on the basis that a beneficiary’s presence in the state satisfied the nexus requirement.  But, the key point is that the “substantial nexus” test of Brady remains.  Likewise, the other three requirements of Brady remain – fair apportionment; no discrimination against interstate commerce, and; fairly related to services that the state provides.  In other words, taxing a business without a physical presence in the state cannot unduly burden interstate commerce.  The Wayfair majority determined that the South Dakota law satisfied these tests because of the way it was structured – limited application (based on transactions or dollars of sales); not retroactive; the state was a member of the Streamlined Sales and Use Tax Agreement; the sellers at issue were national businesses with a large online presence; and South Dakota provided tax software to ease the administrative burden. 

Taxing an Out-Of-State Trust?

In the North Carolina case, the trust at issue was a revocable living trust created in 1992 with a situs of New York. The primary beneficiaries were the settlor’s descendants. None of the descendants lived in North Carolina at the time of the trust’s creation. The trust was divided into three separate trusts in 2002, one for each of the settlor’s children. The beneficiary of one of the sub-trusts was a North Carolina resident at that time. The trustee was replaced in 2005 with a successor trustee who resided in Connecticut. North Carolina tax returns were filed for tax years 2005-2008 for the accumulated trust income, that was distributed to the beneficiaries, including the non-North Carolina beneficiaries. In 2009, the trust filed a claim for a refund of North Carolina taxes in an amount slightly exceeding $1.3 million. The trust claimed that N.C. Gen. Stat. §105-160.2, which assesses tax on the amount of taxable income of the estate or trust that is for the benefit of a North Carolina resident, was unconstitutional on Due Process and Commerce Clause grounds. The defendant denied the claim, and the hearing officer later dismissed the case for lack of jurisdiction.

The trial court dismissed the request for injunctive relief with respect to the refund claim, but denied the defendant’s motion to dismiss the constitutional claims. The trial court then granted summary judgment for the trust on the constitutional claim and ordered the defendant to refund the taxes paid on its accumulated income.

On appeal, the appellate court affirmed. Kimberley Rice Kaestner Trust 1992 Family Trust v. North Carolina Department of Revenue, 248 N.C. 212, 789 S.E.2d 645 (N.C. Ct. App. 2016)The appellate court determined that the trust failed to have sufficient minimum contacts (as required by the Due Process Clause) with North Carolina to subject the trust to North Carolina income tax. The court cited both International Shoe Co. v. Washington, 326 U.S. 310 (1945) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) to support its position on this point. The trust did not have any physical presence in the state during the tax years at issue, contained no North Carolina property or investments, had no trust records that were created or kept in North Carolina, and the place of trust administration was not in North Carolina. Basing the imposition of state tax on a beneficiary’s domicile, by itself, did not establish sufficient minimum contacts with the state to satisfy the Due Process Clause and allow North Carolina to tax a non-North Carolina trust. The appellate court held that Brooke v. Norfolk, 277 U.S. 27 (1928) was controlling. In that case, a Maryland resident created a testamentary trust with a Maryland situs for a Virginia beneficiary. Virginia assessed tax on the trust corpus, but the Court held the assessment to be unconstitutional.

On further review, the state Supreme Court affirmed.  Kimberley Rice Kaestner Trust 1992 Family Trust v. North Carolina Department of Revenue, 371 N.C. 133, 814 S.E.2d 43 (N.C. Sup. Ct. 2018)The state Supreme Court noted that a key to the case was that the trust beneficiary did not receive trust distributions during the years at issue. As such, the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

The North Carolina Supreme Court’s decision was delivered 13 days before the U.S. Supreme Wayfair decision, and was based on the controlling U.S. Supreme Court decision at that time – Quill.  Consequently, the North Carolina Department of Revenue, based on Wayfair, sought U.S. Supreme Court review.  On January 11, 2019, the U.S. Supreme Court agreed to hear the case.  North Carolina Department of Revenue v. Kimberley Rice Kaestner Trust 1992 Family Trust, 139 S. Ct. 915 (2019). 

U.S. Supreme Court Decision

In a unanimous decision, the U.S. Supreme Court affirmed, holding that the North Carolina law violated Due Process.  North Carolina Department of Revenue v. Kimberley Rice Kaestner Trust 1992 Family Trust, No. 18-457, 2019 U.S. LEXIS 4198 (U.S. Sup. Ct. Jun. 21, 2019).  The Court noted that a taxpayer must have “some minimum connection” with the state, and that a rational relationship must exist between the income the state wants to tax and the state.  There must be a fiscal relationship to benefits that the state provides.  That’s a Due Process limitation.  As applied to a trust, and based on Brooke v. Norfolk (cited above), the Court seemed to suggest that whether a trust beneficiary’s in-state contacts are relevant on the nexus question is tied to whether the beneficiary has a “right to control, possess, enjoy or receive trust assets.”  Applying that rationale to the trust at issue, the court determined there was an insufficient nexus between the North Carolina beneficiary and the state for the state to have jurisdiction to tax the trust.  The beneficiary never received an income distribution from the trust for the years at issue and didn’t have a right to demand trust distributions and had no power of assignment.  It was the trustee, under the terms of the trust, that had the sole discretion over distributions.  Indeed, the trust assets could ultimately end up in the hands of other beneficiaries.  But, the Court did not foreclose the ability of a state to tax trust income where the trust gives the resident beneficiary a certain right to trust income. 

Implications.  The Court’s decision does leave in its wake considerations for drafters of trust instruments.  For starters, a purely discretionary trust (e.g., a trust giving the trustee sole discretion over trust distributions) can bar a state from taxing a beneficiary’s income distribution.  That’s especially true when combined with “spendthrift” language that bars the beneficiary from assigning their beneficial interest in the trust.  This type of trust language typically works well when there is a need to place limitations on a beneficiary’s rights and access to trust assets.  While the Court didn’t address the impact of a giving a beneficiary a power of appointment over trust assets in a discretionary trust, it would seem that if such a power is present and exercised, the state would have the ability to tax the beneficiary at least in the year the power is exercised.

The facts of the case indicated that the beneficiary had the right to receive either a share or all of the trust assets upon reaching a particular age, but the right was contingent.  What if the trust language had made the future right not contingent?   Would the Court have concluded that a state has the ability to tax the beneficiary then? 

The Court also pointed out that nexus means something different depending on whether it is being applied to the grantor/settlor of the trust, the trustee or a beneficiary.  A resident trustee satisfies the nexus requirement as does a resident grantor/settlor (with respect to a revocable trust).  But, does that mean that a trust grantor/settlor can be taxed based solely on having created the trust in that particular state?  Maybe that challenge will be forthcoming in the future.


State taxation of trusts varies greatly from state to state in those states that have a state income tax.  A trust’s situs in a state certainly permits that state to subject the trust to the state’s income tax as a resident.  But, a trust may be tied to a state in other ways via a grantor, trustee, assets, or a beneficiary.  In addition, whether a trust is a revocable or irrevocable trust can make a difference. For instance, the Illinois definition of  “resident” includes “an irrevocable trust the grantor of which was domiciled in this State at the time such trust became irrevocable.”  35 ILCS/1501(A)(20)(D); see also, Linn v. Department of Revenue, 2 N.E.3d 1203 (Ill. Ct. App. 2013).  Indeed, a trust may have multiples states asserting tax on the trust’s income. 

However, due process requires that before a state can tax a trust’s income, the trust must have a substantial enough connection (e.g., nexus) with the state.  In addition, while a trust could be subject to state income tax based on its residency, the trust has grantors and trustees and beneficiaries and assets that can all be located in different states – and can move from state-to-state (at least to a degree).  That last point makes the Court’s decision relevant even to those practitioners in states without an individual income tax. 

June 25, 2019 in Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, June 11, 2019

Recent Developments in Farm and Ranch Business Planning


The organization of the farming business is important to those farm and ranch families that are wanting to transition the business to the next generation.  Other families don’t have heirs that are interested in continuing the family business.  For them organizational issues are important from a present tax and farm program payment limitation standpoint (perhaps), but not necessarily that critical for future business succession.

In today’ post, I take a look at some recent developments relevant to entity structuring.  These developments point out just a couple of the various issues that can arise in different settings.

S Corporation Basis Required to Deduct Losses

An S corporation shareholder reports corporate income or loss on their personal income tax return for the year in which the corporate year ends.  I.R.C. §1366(a). Losses or deductions passed through to the shareholder first reduce stock basis. After stock basis has been reduced to zero, remaining loss amounts are applied against debt basis.  I.R.C. §1367(b)(2)(A).  In a year where losses decrease stock and debt basis to zero, the losses can be deducted only if the shareholder increases basis before the end of the corporation’s tax year.

One way to increase basis is to lend money to the S corporation.  But, the loan transaction must be structured properly for a basis increase to result.  For example, in In Litwin v. United States, 983 F.2d 997 (10th Cir. 1993), the court allowed the principal shareholder and principal investor in a Kansas corporation involved in the provision and installation of certain fuel systems for motor vehicles a bad debt deduction for amounts loaned to the corporation.  Why?  Because the shareholder’s loan was tied to his desire to remain a shareholder/employee and he personally guaranteed the large loans that exceeded his investment.  In other words, he was at-risk and his business motives outweighed his investment motives. 

But, a couple of recent developments reveal the wrong way to structure loan transactions if a basis increase is desired.  In Messina v. Comr., T.C. Memo. 2017-213, the petitioners, a married couple, formed an investment advisory firm. They also each owned 40 percent of the outstanding stock of an S corporation. The S corporation subsequently became the 100 percent owner of another business that elected to be a qualified subchapter S subsidiary (QSUB). The QSUB borrowed money from an unrelated third party to finance the acquisition of another business. The petitioners then formed another S corporation that they were the sole owners of. They then used that second S corporation to buy the debt of the QSUB. The petitioners claimed that they could use the QSUB debt that the second S corporation held to increase their tax basis in the first S corporation so that they could deduct losses that passed through to them from the first S corporation. The petitioners claimed that the second S corporation was to be ignored because it was merely acting as an agent or conduit of the petitioners (an incorporated pocketbook of the petitioners). Thus, the petitioners claimed that they had made an actual economic outlay with respect to the acquisition of the QSUB debt to their financial detriment. As such, the petitioners claimed that the second S corporation should be ignored, and its debt actually ran directly between the first S corporation and its shareholders, of which they owned (combined) 80 percent.

The IRS disallowed the loss deduction due to insufficient basis and the Tax Court agreed. The Tax Court determined that there was no evidence to support the claim that the second S corporation was operating as the petitioners’ incorporated pocketbook. The Tax Court noted that the second S corporation had no purpose other than to acquire the debt of the QSUB, and the petitioners did not use the second S corporation to pay their expenses of the expenses of the first S corporation. There also was no evidence that the second S corporation was the petitioners’ agent because the corporation operated in its own name and for its own account. The Tax Court also held that the petitioners had not made any economic outlay except to the second S corporation. As such, the second S corporation could not be ignored, and the petitioners could not use its debt to increase their tax basis. The Tax Court noted that 2014 IRS final regulations and I.R.C. §1366(d)(1)(B) require that shareholder loans must run directly between the S corporation and the shareholder. 

More recently, another court determined that an S corporation shareholder failed to achieve a basis increase on loan transaction.  In Meruelo v. Comr., No. 18-11909, 2019 U.S. App. LEXIS 13305 (11th Cir. May 6, 2019), the taxpayer was a shareholder in an S corporation that bought a condominium complex in a bankruptcy sale. To fund its operations, the S corporation accepted funds from numerous related entities. Ultimately, lenders foreclosed on the complex, triggering a large loss which flowed through to the taxpayer. The taxpayer deducted the loss, claiming that the amounts that the related entities advanced created stock basis (debt basis) allowing the deduction. The IRS disallowed the deduction and he Tax Court agreed. The appellate court affirmed on the grounds that the advances were not back-to-back loans, either in form or in substance. In addition, the related entities were not “incorporated pocketbooks” of the taxpayer. There was no economic outlay by the taxpayer that would constitute basis. There also was no contemporaneous documentation supporting the notion that the loans between the taxpayer and the related entities were back-to-back loans (e.g., amounts loaned to a shareholder who then loans the funds to the taxpayer), and an accountant’s year-end reclassification of the transfers was not persuasive. While the taxpayer owned many of the related entities, they acted as business entities that both disbursed and distributed funds for the S corporation’s business expenses. The appellate court noted the lack of caselaw supporting the notion that a group of non-wholly owned entities that both receive and disburse funds can be an incorporated pocketbook. To generate basis, the appellate court noted, a loan must run directly between an S corporation and the shareholder. 

The Peril of the Boilerplate

The use of standard, boilerplate, drafting language is common.  However, there rarely are situations where “one-size-fits-all” language in documents such as wills, trusts, and formative documents for business entities will work in all situations.  That point was clear in another recent development. 

In a recent IRS Private Letter Ruling (directed to a specific taxpayer upon the taxpayer’s request), a multi-member LLC elected to be treated for tax purposes as an S corporation. Later, the shareholders entered into an operating agreement that governed the rights of shareholders. Section 10 of the agreement provided that, “Upon dissolution…the proceeds from the liquidation of the Company’s assets shall be distributed…to the Members in accordance with their respective positive Capital Account Balances; and, the balance, if any, to the Members in accordance with their respective Percentage interests.” The language is “boilerplate” and was intended to meet the substantial economic effect provisions of Treas. Reg. §1.704-1(b)(1) and protect special allocations of the partnership.

Unfortunately, the language did not require that the distributions be equal to a “per share” basis in all situations. Instead, they could be disproportionate upon liquidation to the extent of differences in their capital accounts at the time of liquidation.  That proved to be a problem.  The LLC engaged in a reorganization and sought a ruling on whether the language created a second class of stock that would terminate the S election. The IRS determined that the fact that the rights were not strictly proportionate created more than a single class of stock in violation of I.R.C. §1362(b)(1)(D) and terminated the S election as of the date of the adoption of the operating agreement. However, the IRS determined that the termination was inadvertent, and the S status of the LLC was restored retroactively. Priv. Ltr. Rul. 201918004 (Nov. 15, 2018).

Trusts – Is the End in Sight?

When does a trust end?  Either by its terms or when there is no longer any purpose for it.  Those are two common ways for a trust to end.  This was an issue in a recent case from Wyoming.  In re Redland Family Trust, 2019 WY 17 (2019), involved a family trust.  The case had been before the Wyoming Supreme Court on multiple occasions. The trust was created in 1989 and amended in 1995. The amendment provided for the appointment of a successor trustee; always required the service of two trustees; created a marital trust for the survivor of the settlors; and revised the buyout provision. The grantors and their five children made contributions to the trust. Upon the death of one of the grantors in 2007 one of the children was appointed as co-trustee. Ligation arose when the surviving grantor’s property was not conveyed to the trust and then again involving removal of the trustees, and an appointed trustee moved to have the trust terminated due to the administrative difficulties to administer, family dysfunction, and because the trust no longer served its purpose. The defendants, (including the co-trustee that resigned) asserted that termination was moot and moved to have the new co-trustee removed. The trial court did not remove the co-trustee and found that the trust was still valid. The trial court found that the co-trustee did not violate any fiduciary duties and that the defendants failed to show gross and willful misconduct to justify her removal. Further the trial court found that the co-trustee’s claims that the trust was invalid should have been raised in the original trust challenge. The trial court determined that the primary reason for the trust (to keep the lands and leases together for the Redland family) had not been frustrated and that the trust remained administratively functional and was not "unlawful, contrary to public policy, or impossible.

On appeal, the Wyoming Supreme Court affirmed. The Court determined that the trust still had a purpose - to keep the ranch holdings together to conduct business. Even though the other purpose of minimizing tax consequences had failed, consolidation of ranch holdings remained a legitimate purpose. The Court also determined that the co-trustee did not violate her fiduciary duties, her duties of impartiality or loyalty, and that her actions did not amount to gross and willful misconduct. In addition, the Court found that the duty of impartiality did not require the trustee to treat all beneficiaries fairly, but simply to act in the best interest of the beneficiaries and equally defend the intentions of the settlors. While the Court could find no precedent with respect to the duty of loyalty the Court held that merely seeking termination of the trust was not a breach of loyalty. In addition, the Court determined that hostility between parties did not warrant removal. 


There are various ways to structure business arrangements.  Not every structure is right for each family situation, but there’s a unique business plan that will do well for you – once you figure out what your goals and objectives are and have a solid understanding of your factual setting.  But, peril lurks.  Today’s post examined just a couple of the issues that can arise.  Make sure to have good planners assisting. 

June 11, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)