Sunday, April 14, 2024

Rights of Co-Tenants (and Adverse Possession of Minerals)

Overview

An issue to consider when setting up an estate plan is whether it is beneficial to leave assets in co-equal ownership to the children.  In a farm setting, the issue can come up when the parents have traditional bypass, credit shelter trust arrangements set up, as well as in the less complex estates where farmland is left outright in co-equal ownership to the children. But a drawback of co-equal ownership is the right of partition of a co-owner. That’s a particularly acute problem when parents have both on-farm and off-farm heirs.

Another issue that can come up involves the rights of a co-owner with a minority ownership percentage to terminate a lease or capitalize on mineral interests without the consent of co-owners.  That was indeed what was involved in a recent case, and it’s the topic of today’s post.

O’Malley v. Adams

228 N.E.3d 379 (Ill. Ct. App. 2023)

This case presented the interesting issues of whether a tenant in common that owns at least one-half interest in mineral rights can drill for oil and gas without the permission of the cotenants, and whether the mineral interest can be adversely possessed. 

Here, the “Prather Trust” and the “O’Malley Trust,” because of various estate planning strategies, ended up as cotenants of farmland.  The trustee of the O’Malley Trust held a 50 percent interest in the mineral estate in farmland and claimed it had acquired the Prather Trust’s 50 percent interest in the mineral estate by adverse possession.  The trial court issued summary judgment for the Prather Trust on the adverse possession issue.  Prather Trust filed counterclaim for an accounting, claiming that O’Malley trust had removed and sold oil and natural gas from the mineral estate without the Prather Trust’s knowledge or consent and that the title insurance company issued a title policy falsely declaring that the O’Malley Trust had merchantable title to 100 percent of the minerals in the mineral estate. The Title Company moved for summary judgment on the basis that removal and sale of minerals by a tenant without permission of cotenant is not a tort under Illinois law, but the court denied the motion.

The trustees of the “Prather Trust” sued the title insurance company for slander of title to the trust’s 50 percent interest in the mineral estate and for conversion of the trust’s share of proceeds from the sale of extracted minerals.  The title company sought summary judgment on the basis that removal and sale of minerals by a tenant in common, without consent of a co-tenant, is not a tort under Illinois law.  The trial court denied the title company’s motion and certified three questions of law to the Illinois Court of Appeals.  However, the title insurance company sought leave to appeal to the Illinois Supreme Court.  The appellate court denied leave to appeal, but then it was allowed by means of a supervisory order from the Illinois Supreme Court.  As a result, an interlocutory appeal allowed.

Three questions were certified to the Illinois Court of Appeals:  1)  Does Illinois law provide a tenant in common owning at least one-half of the mineral interest in land an unfettered right to drill for oil and gas without cotenant permission?; 2) Whether Illinois law (stat. 765 ILCS 520/2) impose a mandatory requirement that a co-tenant must always seek court permission before drilling for oil and gas?; and 3) whether Illinois case law preclude a nondrilling cotenant from bringing a conversion claim against a drilling cotenant when the drilling cotenant removes oil and gas from property without the nondrilling cotenant’s permission, and preclude a nondrilling cotenant from brining a slander of title claim against their cotenant after the cotenant’s decision to grant a lease to a third party to drill for oil and gas on the property?

The title insurance company claimed that a tenant in common owning at least 50 percent of the mineral interest in land can drill for, remove and sell the minerals from the mineral estate without permission of other cotenant(s), and that the only remedy of the nondrilling cotenant is an accounting.  As such, a 50 percent or more owner doesn’t have to follow the Oil and Gas Rights Act as a precondition to drilling and that failing to follow the procedure is not a tort.  Conversely, the Prather Trust claimed that permission of a cotenant(s) is required before removal and sale of minerals or a valid court order must be obtained, and that drilling cotenant is liable for trespass and conversion.

The appellate court answered the certified questions in the negative.  Illinois law does not provide a tenant in common owning at least one-half of the mineral interest in land an unfettered right to drill for oil and gas without cotenant permission.  As to whether Illinois law (stat. 765 ILCS 520/2) imposes a mandatory requirement that a cotenant must always seek court permission before drilling for oil and gas, the appellate court said court permission was only necessary when a cotenant objects.  The appellate court also determined that Illinois case law did not preclude a nondrilling cotenant from bringing a conversion claim against a drilling cotenant when the drilling cotenant removes oil and gas from property without the nondrilling cotenant’s permission.  Illinois law also does not preclude a nondrilling cotenant from brining a slander of title claim against their cotenant after the cotenant’s decision to grant a lease to a third party to drill for oil and gas on the property. 

Adverse Possession?

The appellate court did not address the adverse possession issue.  Perhaps it will be discussed as the case heads back to the trial court for further proceedings.  But let’s take a closer look at the issue of whether mineral interests can be adversely possessed.

Example – Kansas approach.  The Kansas statute on adverse possession is typical:

Kan. Stat. Ann. §60-503. Adverse possession. No action shall be maintained against any person for the recovery of real property who has been in open, exclusive and continuous possession of such real property, either under a claim knowingly adverse or under a belief of ownership, for a period of fifteen (15) years.

Other state adverse possession statutes may also include a requirement of “hostility” (e.g., without permission of the true owner).  Once the elements of the state statute are satisfied for the statutory period (15 years in Kansas), the adverse possessor can bring a quiet title action to acquire legal ownership of the disputed property. 

Does adverse possession apply to minerals?  The answer can be complicated.  The bifurcation of surface and mineral rights (oil, gas, coal and metals) raises a question of how adverse possession applies when the property at issue (mineral rights) is subsurface and cannot be seen or accessed from the surface, and can be owned by a party different than the surface owner.  Does acquiring title to the surface also mean that the subsurface minerals are adversely possessed?  The answer is “no” unless there has been exploration or exploitation of the minerals that satisfies the adverse possession statute.  Indeed, some states have statutes that bar acquiring title to minerals by adverse possession.  However, if the adverse possessor of the surface uses or occupies the subsurface minerals, a claim of ownership of the minerals might be possible via adverse possession. Actual possession of the minerals is the key.  As applied, that concept means that if the mineral estate has been severed from the surface estate such that the two estates are owned by different parties, the adverse possession of the surface estate doesn’t constitute adverse possession of the mineral estate absent actual possession (i.e., usage by drilling and production) of the minerals.  See, e.g., Natural Gas Pipeline Company of America v. Pool, 124 S.W.3d 188 (Tex. 2003).  This also means that a royalty interest cannot be adversely possessed because it is a no-possessory interest – there is no royalty until production occurs.  This is also the result with respect to a non-participating royalty interest and an overriding royalty interest. See, e.g., Connaghan v. Eighty-Eight Oil Company, 750 P.2d 1321 (Wyo. 1988).  But an operating working interest is a possessory interest that can be adversely possessed.  As for a non-operating working interest, the caselaw is either non-existent in jurisdictions or unclear as to whether adverse possession applies.

So, what can a mineral interest owner do to protect against a possible adverse possession claim?  Leasing the mineral rights to an active company would be a good approach as it would establish a visible use of the mineral rights that is ongoing. 

Conclusion

Co-ownership of farmland among the children after the parents are gone rarely works out well.  The recent Illinois case points out some of the issues that can arise.  Perhaps on remand the Illinois court will address the adverse possession issue with respect to minerals.

April 14, 2024 in Real Property | Permalink | Comments (0)

Monday, April 1, 2024

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

Cranberry Bogs and the Clean Water Act

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

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

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

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

PFAS and Rural Landowners

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

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

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

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

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

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

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

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

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

Quiet Title Act is not Jurisdictional – Implications for Property Rights

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

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

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

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

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

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

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

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

Monday, March 4, 2024

Farm Bankruptcy; Sovereign Immunity; Farm Lease and Pipeline Damages

Introduction

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

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

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

Farm Bankruptcy

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

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

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

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

Suing the Government – Sovereign Immunity

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

Fair Credit Reporting Act Waives Sovereign Immunity 

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

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

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

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

Farm Lease Law

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

Interpretation of Farm Lease at Issue

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

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

The Proof and Computation of Property Damage

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

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

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

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

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

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

Saturday, January 27, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part Six): Foreign Ownership of Agricultural Land

Overview

Today’s article is the sixth in a series concerning the Top Ten ag law and tax developments of 2023.  To recap, here’s the list of the top developments so far:

  • 10 - Court orders removal of wind farm.
  • 9 – Reporting Rules for Foreign Bank Accounts
  • 8 – New Business Information Reporting Requirements
  • 7 – “Renewable” Fuel Tax Scam
  • 6 – Limited Partners and Self-Employment Tax
  • 5 – COE Mismanagement of Missouri River Water Levels
  • 4 – The Employee Retention Credit
  • 3 – California’s Proposition 12 and the Dormant Commerce Clause

I am now up to what I view as the second most significant development in ag law and tax in 2023.  It’s an issue that received attention in numerous state legislatures as well as at the federal level.  It’s the issue of foreign ownership of agricultural land – and it’s the topic of today’ post.

Background

The issue of foreign ownership of agricultural land received a lot of attention in 2023 – both at the federal as well as at the state level in numerous states.  It’s not a new issue.  It’s an issue that’s been around for centuries. Under the English common law, aliens could not acquire title to land except with the King's approval.  The King understood that control and ownership of the land was critical to national security and the food supply and did not want disloyal subjects owning or acquiring an interest in land.  As a result, the notion of limiting alien ownership of agricultural land was well imbedded in United States jurisprudence. 

Federal law.  In the 1970s, the issue of foreign investment in and ownership of agricultural land received additional attention because of several large purchases by foreigners and the suspicion that the build-up in liquidity in the oil exporting countries would likely lead to more land purchases by nonresident aliens.  The lack of data concerning the number of acres actually owned by foreigners contributed to fears that foreign ownership was an important and rapidly spreading phenomenon. 

    AFIDA.  As a result of the scant data available on foreign investment in agricultural land, the Congress enacted the Agricultural Foreign Investment Disclosure Act (AFIDA).  7 U.S.C. §3501 et seq. Under AFIDA, the USDA obtains information on U.S. agricultural holdings of foreign individuals and businesses.  In essence, AFIDA is a reporting statute rather than a regulatory statute.  The information provided in reports by the AFIDA helps serve as the basis for any future action Congress may take in establishing direct controls or limits on foreign investment in agricultural land and provides useful information to states considering limitations on foreign investment. The Act requires that foreign persons report to the Secretary of Agriculture their agricultural land holdings or acquisitions.  The Secretary assembles and analyzes the information contained in the report, passes it on the respective states for their action and reports periodically to the Congress and the President.

During 2023, legislation was proposed in the Congress that would increase oversight and restrict foreign investments in and acquisitions of land located within the U.S.

Note:  On January 18, 2024, the U.S. Government Accountability Office (GAO) issued a report that reviews foreign investments in U.S. farmland and evaluates the effectiveness (or lack thereof) of the USDA’s procedures for obtaining and disseminating the data on foreign investment that it receives via the AFIDA.  The GAO also provided recommendations to the USDA on how it can improve the reliability of the data it collects and how it can improve its procedures in distributing the collected information to other federal agencies. 

    FSA request for public comments.  In early 2024, the USDA’s Farm Service Agency (FSA) announced that it was seeking public comments on the AFIDA reporting Form (FSA-153).  Comments are being solicited concerning how the Form can be improved to gather AFIDA-required reporting information.  FSA proposes to update Form FSA-153 to gather information on long-term leases, the impact of foreign investment on ag producers and rural communities, and certain geographic information.  FSA asserts the updated Form will provide the government with “precise and meaningful” data under the AFIDA.   

State action.  Recently, the issue of restricting foreign investment in and/or ownership of agricultural land has been raised in Alabama, Arizona, Arkansas, California, Florida, Indiana, Iowa, Mississippi, Missouri, Montana, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, and Wyoming. Each of these states have proposed, or planned to propose, legislation restricting foreign ownership and/or investment in agricultural land to varying degrees.  Several high-profile events have spurred this renewed interest including a Chinese-owned company acquiring over 130,000 acres near an Air Force base in Texas and a 300-acre purchase by another Chinese company near a different Air Force base in North Dakota.  Also, the China-originated virus in late 2019, the slow “fly-over” of a Chinese spy balloon from Alaska to South Carolina in 2023, as well as mysterious damages to many food processing facilities, pipelines and rail transportation have contributed to the growing interest in national security and restrictions on ownership of U.S. farm and ranchland by “known adversaries.”

State Enactments in 2023

Arkansas.  Senate Bill 383, enacted in 2023, restricts investors from certain countries, including China, from acquiring an interest in land within the state.  In October, Arkansas became the first in the nation to enforce a state foreign ownership law when the Arkansas Attorney General ordered a subsidiary of Syngenta Seeds, a company owned by an arm of the Chinese communist party, to divest its ownership interest in farmland it owned within the state.  

Florida.  S.B. 264 was signed into law on May 8, 2023, and is codified at Fla. Stat. Ann. §§ 692.201-205.  The new law limits landownership rights of certain noncitizens that are domiciled either in China or other countries that are a “foreign country of concern” (FCOC).  Fla. Stat. §§692.201-.204.   The countries considered as a FCOC under the law include China; Russia; Iran; North Korea; Cuba; Venezuela’s Nicolás Maduro regime; and Syria.

The law was almost immediately challenged in court. Shen v. Simpson, No. 4:23-cv-208 (N.D. Fla., filed May 22, 2023).  Four Chinese citizens living in Florida, along with a real estate brokerage firm, claimed that the law violated their equal protection rights because it restricts their ability to purchase real property due to their race. They also claimed that the law violated the Due Process Clause and the Supremacy Clause of the Constitution and the Fair Housing Act (FHA). Under the law, Chinese investors that are not U.S. citizens that hold or acquire and interest in real property in Florida on or after July 1, 2023, must report their interests to the state or be potentially fined $1,000 per day the report is late.  Chinese acquisitions after July 1, 2023, are subject to forfeiture to the state with such acquisitions constituting a third-degree felony.  The seller commits a first-degree misdemeanor for knowingly violating the law.  The plaintiffs sought an injunction against the implementation of the law before it went into effect on July 1, 2023.  However, the law went into effect on July 1, with the litigation pending.

On August 17, the court denied the plaintiffs’ motion for an injunction.   Shen v. Simpson, No. 4:23-cv-208-AW-HAF, 2023 U.S. Dist. LEXIS 152425 (N.D. Fla. Aug. 17, 2023).  The court determined that the Florida provision classified persons by alienage (status of an alien) rather than by race because it barred landownership by persons who are not lawful, permanent residents and who are domiciled in a “country of concern” while exempting noncitizens domiciled in countries that were not “countries of concern.”  Thus, the restriction was not race-based (it applied equally to anyone domiciled in China, for example, regardless of race) and was not subject to strict scrutiny analysis which would have required the State of Florida to prove that the law advanced a compelling state interest narrowly tailored to achieve that compelling interest.  Strict scrutiny, the court noted only applies to laws affecting lawful permanent aliens, and the Florida provision exempts nonresidents who are lawfully permitted to reside in the U.S.  Thus, the law was to be reviewed under the “rational basis” test.  See, e.g., Terrace v. Thompson, 263 U.S. 197 (1923).

The court held that the State of Florida did have a rational basis for enacting the ownership restrictions – public safety and to “insulate [the state’s] food supply and…make sure that foreign influences…will not pose a threat to it.”  This satisfied the rational basis test for purposes of the plaintiffs’ equal protection challenge and the FHA challenge (because the law didn’t discriminate based on race) and also meant that the court would not enjoin the law because the plaintiffs’ challenge on this basis was unlikely to succeed. 

The Florida law, the court concluded, also defined “critical military infrastructure” and “military installation” in detail which gave the plaintiffs sufficient notice that they couldn’t own ag land or acquire an interest in ag land within 10 miles of a military installation or “critical infrastructure facility,” or within five miles of a “military installation” by an individual Chinese investor.  Thus, the court determined that the plaintiffs’ due process claim would fail. 

The plaintiffs also made a Supremacy Clause challenge claiming that federal law trumped the Florida law because the Florida law conflicted with the manner in which land purchases were regulated at the federal level.  They claimed that federal law established a procedure to review certain foreign investments and acquisitions for purposes of determining a threat to national security.  The court disagreed, noting the “history of state regulation” of alien ownership” and that the Congress would have preempted state foreign ownership laws conflicting with the federal review procedure. 

North Dakota.  S.B. 2371, effective through July 31, 2025, was enacted in 2023.  The legislation gives counties and municipalities the power to prohibit local development by a foreign adversary.  County commissions, city commissions, or city council may not authorize a development agreement with a foreign adversary whether individual or government. Any ordinance contrary to this section is void.  During 2023, North Dakota also enacted H.B. 1135 and H.B. 1371, primarily dealing with existing law concerning ag business structures. 

Oklahoma.  S.B. 212 was enacted in 2023.  The law specifies that no person who is not a US citizen shall acquire title to land either directly through a business entity or trust. These requirements don’t apply to a business entity that has legally operated in the US for at least 20 years.  Any deed recorded with a county clerk shall include proof that the person or entity obtaining the land is in compliance.  No application to lands now owned by aliens so long as they are held by the present owners nor to any alien who shall take up bona fide resident of the state or any lawfully recognized business entity.  It is the duty of the attorney general or district attorney to institute a suit on behalf of the state if they have reason to believe any lands are being held contrary to the Act.  The law also creates a citizen land ownership unit to enforce the provisions of the act within the office of the attorney general.

Other states.  In 2023, in addition to the above-mentioned states, the following states also enacted various types of legislation designed to address foreign ownership/investment of agricultural land:

  • Alabama (H.B. 379, enacted on May 24, 2023)
  • Idaho (H.B. 173, enacted on April 3, 2024)
  • Louisiana (H.B. 537, enacted on June 27, 2023)
  • Mississippi (H.B. 280, enacted on March 22, 2023). This bill merely creates a committee to study the ownership of agricultural land in the state by a foreign government.
  • Montana (S.B. 203, enacted on May 4, 2023)
  • South Dakota (H.B. 1189, enacted on March 9, 2023). This bill is a reporting requirement only.
  • Tennessee (H.B. 40, enacted on May 11, 2023)
  • Utah (H.B. 186, enacted on March 13, 2023)
  • Virginia (S.B. 1438, enacted on May 12, 2023)

Conclusion

Expect the foreign ownership of agricultural land issue to remain a big issue in 2024.  As of January 26, 2024, bills addressing foreign ownership/investment in agricultural land have been filed in the following states:

  • Alaska (HB 252)
  • Arizona (HB 2407 and HB 2439)
  • Florida (HB 1455),
  • Hawaii (SB 2617; SB 2624; HB 2541; HB 2542; HB 2594)
  • Maryland (SB 392)
  • Mississippi (SB 2025; HB 348)
  • Nebraska (LB 1301)
  • New Jersey (A 191)
  • Oklahoma (SB 1705; SB 1773; SB 1953; SB 2002; HB 3077; HB 3125)
  • Tennessee (SB 1950)
  • Washington (SB 6290)

January 27, 2024 in Real Property, Regulatory Law | Permalink | Comments (0)

Friday, January 5, 2024

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

Overview

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

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

Scope of the Dealer Trust

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

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

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

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

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

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

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

Equity Theft

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

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

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

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

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

forfeiture procedures.

Customer Loyalty Rewards

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, January 2, 2024

2023 in Review – Ag Law and Tax

Overview

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

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

Labor Disputes in Agriculture

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

In 2023, the U.S. Supreme Court ruled that an employer can sidestep federal administrative agency procedures of the National Labor Relations Board and go straight to court when striking workers damage the company’s property rather than merely cause economic harm.  The case involved a concrete company that filed a lawsuit for damages against the labor union representing its drivers.  The workers filled mixer trucks with concrete ready to pour knowing they were going to walk away.  The company sued for damage to their property – something that’s not protected under federal labor law.  The Union claimed that the matter had to go through federal administrative channels first. 

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

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

Swampbuster

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

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

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

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

Railbanking

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

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

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

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

CAFO Rules

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

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

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

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

Charitable Remainder Annuity Trust Abuse

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

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

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

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

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

Conclusion

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

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

Tuesday, December 26, 2023

More Issues in Ag Law and Tax for Farmers, Ranchers and Rural Landowners

Overview

The issues in the courts and with the IRS that are important to farmers and ranchers keep on coming.  Soon, I will be posting what I view to be the biggest developments of 2023.  For today’s post, I summarize some key matters and pose some year-end tax planning thoughts for which there still might be time to utilize for the 2023 return.

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

Important “Takings” Case at Supreme Court

DeVillier v. Texas, 63 F.4th 416 (5th Cir. 2023)

The government has the right to take your property from you if it wants it for a public use.  But, under the Fifth Amendment, the government must pay you for it.  The right to receive just compensation for property the government takes is in the Fifth Amendment.  It’s an important issue for farmers and ranchers because of how critical land ownership is to farming and ranching.  A case soon to be argued at the U.S Supreme Court involving a Texas farmer tests the limits of the government’s taking power. 

The family involved in the case has farmed the same land for a century.  There never was a problem with flooding until the State renovated a highway and changed the surface water drainage.  In essence, the renovation turned the highway into a dam and when tropical storms occurred, the water no longer drained into the Gulf of Mexico.  Instead, the farm was left flooded for days, destroying crops and killing cattle.  In essence, the farm had been turned into a retention pond. 

The farmer sued the State to get paid for the taking of his farm.  Once the case got to federal court, the appellate court dismissed it, saying that the farmer couldn’t sue under the Fifth Amendment – only State officials can.  But that seems incorrect.  The Fifth Amendment contains a remedy when the government takes your property – you get paid for it. 

The U.S. Supreme Court agreed to hear the case on Sept. 29, 2023.  The oral argument date is set for January 16, 2024.  The Court’s decision will likely be issued by the end of June.  The outcome will be an important one for agriculture. 

Tax Treatment of Income from Farm-Related Assets

Breeding fees.  If you report income from breeding fees and then later issue a refund, still report the breeding fees as income in the year received, but then take a deduction when the refund is made.

Soil, sod and other minerals.  Report the sale of soil, sod and other minerals on a regular basis as ordinary income.  For mineral deposits, the disposition could be held to be a sale reported as capital gain.  But that probably is not going to be the case in most situations because a lease was likely involved.   

Crop share or livestock share rent is included in income in the year it is reduced to money (or its equivalent), fed to livestock or donated to charity. For livestock, the amount of cash received during the tax year from the sale of livestock is included in gross income. 

Farmland and breeding stock.  Gains and losses arising from the sale of certain capital assets such as farmland and breeding livestock get a special, capital gain, tax treatment that is often at a lower rate than the seller’s individual rate.

Land trades.  If you trade land, if the trade is even in dollars there still could be ordinary gain to report unless you trade bare land for bare land.  This often comes as a surprise to farmers trading land.

Tax Strategy for Purchased Livestock

A key question for many farmers is whether livestock purchased for draft, dairy or breeding purposes should be depreciated or included in inventory.  While purchased livestock that are held primarily for sale must be included in inventory, livestock that are purchased or raised for draft, breeding or dairy purposes may be depreciated.  What’s the best tax strategy – should you include them in inventory or depreciate them?  As with many tax questions, the answer “depends.”

Depreciation is beneficial for several reasons – it’s an ordinary deduction that reduces your net and self-employment income; any depreciation recapture is not subject to self-employment tax for sole proprietors and partners in a partnership; and the amount of gain in excess of original cost can qualify to be taxed at favorable capital gains rates.

So, is this a better tax result than capitalizing livestock and holding them in inventory?  The answer turns on whether a current deduction for depreciation will outweigh subsequent capital gain treatment upon sale.  For high volume sales generating significant income, an inventory method might be better.

If you use accrual accounting, generally the livestock should be inventoried at the lowest possible value.  But carefully select the inventory method that is utilized. 

Is a “Legal” Fence a “Sufficient” Fence?

If your fence meets the state law requirements for a “legal” fence, is that enough to shield you from liability if your animals get out and cause damage?  Not necessarily.  A legal fence must also be a "sufficient" fence.  Having a legal fence does not mean that you won’t be liable for damage your animals cause if they escape. Not having a legal fence is negligence. So, having a legal fence is the minimum standard, but it is not necessarily a sufficient fence for livestock.  There are numerous cases that have involved a legal fence where the court held it was not deemed to be a sufficient fence.

This issue often comes up with animals other than cattle. But it can come up with cattle also. The situation is based on the facts, but the point is if your fence meets the requirements to be a legal fence, that's just the first step of the analysis. It still must be a sufficient fence to keep your animals in if you live in a "fence-in" jurisdiction – which is most of the country.

Don't cause issues with your neighbor by insisting that your fence meets the minimum statutory requirements. That's literally the least you can do.  You must do more under the law.

Entire Commercial Wind Development Ordered Removed

United States v. Osage Wind, LLC, No. 4:14-cv-00704-CG-JFJ,

2023 U.S. Dist. LEXIS 226386 (N.D. Okla. Dec. 20, 2023)

A federal court has now ordered the removal of an entire commercial wind energy development in Oklahoma and set a trial for damages.  The litigation has been ongoing for over 10 years.  The ruling follows a 2017 lower court decision concluding that construction of the development constituted “mining” and required a mining lease from a tribal mineral council which the developers failed to acquire. 

The wind energy development includes 84 towers spread across 8,400 acres of leased surface rights, underground lines, overhead transmission lines, meteorological towers and access roads. In 2017, the U.S. Circuit Court of Appeals for the Tenth Circuit held that the wind energy company’s extraction, sorting, crushing and use of minerals as part of its excavation work constituted mineral development that required a federally approved lease.  The company never received one.

In its decision to order removal of the towers, the court weighed several factors but ultimately concluded that the public interest in private entities abiding by the law and respecting government sovereignty and the decision of courts was paramount.

Optimizing Tax Liability

Many farmers often want to eliminate income taxes every year.  But maybe a better strategy over the long run is to optimize the amount paid each year.  That can be done in several ways, and there still might be time to use some of the techniques on your 2023 return. 

As a farmer you can file and pay income taxes by March 1 or simply pay one estimated tax payment on January 15 and then pay the balance on April 15.  To do this, the amount you need to pay by January 15 is the lesser of 100 percent of the prior year’s tax or two-thirds of this year’s tax.  With higher interest rates, the saving on deferring tax for six weeks can add up.  Do the math to figure out what the best approach is for you.

Also, you can decide to not defer grain contract income by reporting the income in 2023.  Similarly, only the portion of crop insurance payments received in 2023 that relate to yield loss is deferable.  The price loss portion is not deferable into 2024. 

For 2024, if you have children under the age of 18 that work on your farm, paying them wages won’t trigger payroll tax.  If they are older, pay them in grain to get the same result.  Also, consider gifts of grain to children to drop your tax liability and not create one for a child.

Conclusion

Just some “odds and ends” to think about this last week of December. 

December 26, 2023 in Income Tax, Real Property | Permalink | Comments (0)

Monday, November 27, 2023

Current Issues in Ag Law and Taxation

Overview

Today’s article addresses several current and recurring issues in the fields of law and taxation that are of importance to farmers and ranchers. 

Right to Repair

Agribusinesses can exert power over farmers through limits on technology use and access, as well as by other agreements that producers sign to utilize services and products.  A big issue is whether the ownership of the technology associated with farm equipment and machinery limits a farmer’s right to repair. 

When a farmer buys new machinery, the manufacturer may view the transaction more as a technology lease than as a machine sale. At issue is the ownership of the software and technology in the farm machinery.  The dramatic increase in computerization of equipment means that all types of data are sent to the cloud by a transmitter.  As a result, the manufacturer will claim that only an authorized dealer can make repairs. 

This is the crux of the “right to repair” argument.  John Deere has said it will provide timely electronic access to farmers and independent repair shops of the manuals, software and tools necessary to operate, maintain, repair or upgrade equipment.  But access won’t be free, and the agreement is off if a party to the deal introduces right to repair legislation in a state legislature.   Other manufacturers have struck similar deals.

At least 11 states have introduced legislation on the issue recently. Colorado’s right to repair law, “The Consumer Right to Repair Agriculture Equipment Act,” (HB 23-1011) goes into effect at the start of 2024. 

Good Husbandry Provisions in Ag Leases

According to the USDA, about 40 percent of all farmland is leased.  A requirement of good husbandry is a part of all ag leases, either through language in the lease or implicitly where a court will require the tenant to farm in accordance with generally accepted farming practices.  See, e.g., Bostic v. Stanley, 608 S.W.3d 907 (Ark. Ct. App. 2020).  It’s tied to the common law duty of “waste” – the tenant can’t mismanage the land resulting in substantial injury.  Examples include removing topsoil, demolishing buildings or fences, cutting timber or destroying cover crops.  It can also include improper tillage practices and failing to control weeds or insects.  There’s no specific legal definition, so the interpretation of good husbandry’s meaning is left up to the courts unless the lease has a specific clause. 

In one case, a breach of the duty of good husbandry was found where the tenant started harvesting wheat too late.  A breach was also found in another case where the tenant removed manure at the end of the lease.  But a breach won’t likely be found if weather prevents completion of harvest and other farms in the area have been similarly affected. 

If you’re concerned about your tenant’s farming practices, consider putting a clause in a written lease detailing the farming practices that you deem appropriate and those that you don’t. 

WOTUS Update

The legal challenges and disputes continue related to the regulatory definition of “waters of the United States” or WOTUS.  The disputes concern the EPA and Corp of Engineers regulation published on September 8 purportedly conforming the regulatory definition of “waters of the United States” to the Supreme Court’s ruling in a case last May.  https://www.federalregister.gov/documents/2023/09/08/2023-18929/revised-definition-of-waters-of-the-united-states-conforming  The disputes have implications for many farmers and ranchers.  Twenty-six states have sued claiming that the EPA and the Corps of Engineers violated the law when it modified its existing rule to supposedly comply with the Court’s ruling.  The states claim that the agencies didn’t provide enough analysis or explanation of the scope of federal jurisdiction in response to the Court’s decision.  They also claim the federal agencies are undermining state control over land management and failed to define terms such as “relatively permanent” and “continuous connection.” 

In addition, Texas and Idaho claim that the modified rule oversteps state sovereignty and asserts federal authority over non-navigable waters. Some industry and ag groups have joined this lawsuit. 

As the Supreme Court ruled, only relatively permanent waters that are directly connected to larger navigable water bodies are “waters of the U.S.”  It’s up to the federal agencies to write a rule that provides the parameters of that definition.  Expect the legal battles to continue.

Considerations When Buying Farmland

Whether to buy farmland is perhaps the biggest decision you’ll have to make with respect to your farming operation as well as your legacy.  But there are lots of things to consider before signing on the dotted line.  Of course, price is a primary consideration in most transactions, but there are factors that can influence the land’s value that aren’t necessarily reflected in the sale price. 

The following is a list of some of those factors:

  • Make sure to account for any improvements that will be needed to buildings, fences and drainage tile.
  • Also check the watershed and potential drainage or irrigation issues.
  • Is the land in a drainage district?
  • Is there potential for an endangered species habitat designation?
  • Is there an old dump site on the property?
  • Are there any government contracts such as the CRP or easements on the property?
  • Is the land leased to a tenant? If so, has the tenancy been terminated?  Simply buying the land will not terminate an existing lease. 
  • Is there a subsurface tenant?

Checking available public records and asking questions of the current owner and neighbors is a good thing to do.  Also, physically inspect the property, and get the seller to sign a thorough disclosure document.

Perhaps most importantly, don’t let your emotions drive the decision.

Exclusion of Meals and Lodging from Income

The value of meals and lodging furnished on the business premises for the employer’s convenience and as a condition of employment is not taxable income to the employee and is deductible by the employer if the meals and lodging is provided in-kind.  It also isn’t wages for FICA and FUTA purposes.

This is a C corporation benefit.  A C corporation provides the broadest fringe benefits of any entity structure.  One of those is the ability to provide tax-free meals and lodging to employees.  The meals and lodging must be furnished on the business premises, be provided for the employer’s convenience and as a condition of employment.  Remoteness of the farm or ranch is a factor, but not a determining one.  See, e.g., Caratan v. Comr., 442 F.2d 606 (9th Cir. 1971).  Whether you have a good business reason to have employees on the premises at all times is.  A key to success on that issue is documenting the need and requirement in employment agreements or corporate resolutions.

If done right, it can be a nice tax-free fringe benefit for employees and a deduction for the corporation.

Hobby Losses

For a business expense to be deductible, it generally must be “ordinary and necessary” and incurred in a business that is conducted with a profit intent.  If not, the activity is deemed to be a hobby and associated losses are “hobby losses.” The impact of the tax law on hobby losses is currently harsh. 

Over the years, many cases involving ag activities have been the focus of the IRS.  If the activity is deemed to be a hobby, any losses are miscellaneous itemized deductions which are currently disallowed. See, e.g., Gregory v. Comr., 69 F.4th 762 (11th Cir. 2023), aff’g., T.C. Memo. 2021-115.  But all the income from the activity must be reported into gross income. 

The IRS and the courts analyze nine factors for determining whether there is a profit intent.  Those factors are the manner in which the activity is conducted; the taxpayer’s expertise or that of adviser(s); the time and effort put in; whether there’s an expectation that the assets will appreciate in value; the taxpayer’s success in carrying on similar activities; the taxpayer’s history of income or loss; whether there’s ever been a profit; and two socioeconomic factors.

None of the factors is conclusive by itself.  It’s how they stack up in a given situation.  What is for sure, though, is that the tax rule is harsh if your activity is deemed to be a hobby.

An S Corporation is a Separate Entity from Yourself

A key principle of tax law is that you can’t deduct expenses that you pay on behalf of someone else.  That rule extends to corporations and their shareholders.  The rule was applied in a recent Tax Court case, Vorreyer, et al. v. Comr., T.C. Memo. 2022-97, involving a farming business operating as an S corporation. 

You can’t deduct an expense of your corporation as your own - even if the corporation is a pass-through entity such as an S corporation.  While there’s a limited exception, it didn’t apply in the recent case where the taxpayers operated a farm individually and through several related entities including an S corporation.  They paid the corporation’s property taxes and utility expenses and deducted the amounts on their personal returns. 

But the Tax Court said that the business expenses of the S corporation could not be disregarded at the corporate level.  The S corporation’s income must be matched at the corporate level against the S corporation’s expenses that were incurred to produce that income before the net income or loss amount can flow through to the shareholders. 

The result was that the deductions on the shareholders’ personal returns were disallowed.  Although S corporate income or loss would eventually flow through to them, a corporation is a separate taxable entity.

The lesson is clear – make sure to respect an entity structure.  You can’t claim a personal deduction for a corporate expense.

FBAR Penalties

In recent years some American farmers have started farming operations in foreign countries, particularly in South America.  Doing so could trigger a provision in the Bank Secrecy Act and if the provision is violated, the penalties can be harsh.  Under the rule, persons with a bank account in a foreign country containing $10,000 or more must report the account to the IRS by the annual tax filing deadline. 

In a recent case involving a dual citizen of the U.S. and Romania, the IRS asserted penalties of almost $3 million.  He didn’t know about the requirement and didn’t report his foreign accounts for several years.  He disputed the penalty amount, claiming that it should be reduced to $50,000 based on his failure to file one form annually for five years that disclosed all of his foreign accounts.  The Government claimed the penalty was on a per account basis.  He won the argument at the trial court but lost on appeal.  At the Supreme Court he won – the penalty is on a per-form basis. Bittner v. United States, 598 U.S. 85 (2023).

For farmers with farming operations outside the U.S. it’s likely that a foreign bank account exists.  If so, it’s imperative that Form FinCen 114 is filed annually that reports those accounts to the IRS. 

Conclusion

I’ll ramble on more next time.  And…I’m starting to compile my list of the biggest ag law and tax developments of 2023.  What do you think were the most important ones?

November 27, 2023 in Environmental Law, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)

Monday, October 30, 2023

Reporting of Beneficial Ownership Information; Employee Retention Credit; Exclusion of Gain on Sale of Land with Residence; and a Farm Lease

Introduction

As I try to catch up on my writing after being on the road for a lengthy time, I have several items that seem to be recurring themes in what I deal with. 

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

New Corporate Reporting Requirements

The Corporate Transparency Act (CTA), P.L. 116-283, enacted in 2021 as part of the National Defense Authorization Act, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax.  It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.  The effective date of the CTA is January 1, 2024.    

Who needs to report?  The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.”  A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe.  A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office. 

Note:  Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company. 

Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office. 

Exemptions.  Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, certain large accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories.  In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S.   But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information.  Having one large entity won’t exempt the other entities. 

What is a “Beneficial Owner”?  A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

  • Exercises substantial control over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company

Note:  Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.

What must a beneficial owner do?  Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes.  Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.  Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.  A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.

Note:  If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.

Filing deadlines.  Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report.  Businesses formed after 2024 must file within 30 days of formation.  Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed. 

Note:  FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

Penalties.  The penalty for not filing is steep and can carry the possibility of imprisonment.  Specifically, noncompliance can result in escalating fines ranging from $500 per day up to $10,000 total and prison time of up to two years.     

State issues.  A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN.  In addition, states must provide filers with the appropriate reporting company Form.

Withdrawing an ERC Claim

Over the past year or so many fraudulent Employee Retention Credit claims have been filed. You may have heard or seen the ads from firms aggressively pushing the ability to claim the ERC.    It’s gotten so bad that the IRS stopped processing claims for the fourth quarter of 2023.  Many farming operations likely didn’t qualify for the ERC because they didn’t experience at least a 20 percent reduction in gross receipts on an aggregated basis (an eligibility requirement for the ERC) but may have submitted a claim.

Now IRS has provided a path for those that want to withdraw their claim so as not to be hit with a tax deficiency notice and penalties. IR 2023-169 (Sept. 14, 2023).

A withdrawal is possible for those that filed a claim but haven’t received notice that the claim is under audit.  Just file Form 943 and write “withdrawn” on the left-hand margin.  Make sure to sign and date the Form before sending it to the IRS. If your claim is under audit provide the Form directly to the auditor.  If you received a refund but haven’t cashed it, write “VOID and ERC WITHDRAWAL” and send it back to the IRS. 

How Much Gain on Land Can Be Excluded Under Home Sale Rule?

When you sell your principal residence, you can exclude up to $500,000 of gain on a joint return ($250,000 on a single return) if you have owned the home and used it as your principal residence for at least two out of the last five years immediately preceding the sale.  I.R.C. §121.  But how much land can be included with the sale of the home and have gain excluded within that $500,000 limitation?  The Treasury Regulations provide guidance. 

For starters, the land must be adjacent to the principal residence and be used as a part of the residence. Treas Reg. §1.121-1(b)(3).  In addition, the taxpayer must own the land in the taxpayer’s name rather than in an entity that the taxpayer has an ownership interest in (unless the entity is an “eligible entity” defined under Treas. Reg. §301.7701-3(1)).  Land that’s been used in farming within the two-year period before the sale isn’t eligible because its use in farming means it’s not been used as part of the residence. 

Note:  Sale of the principal residence and sale of the adjacent land is treated as a single sale for purposes of the gain limitation amount.  That’s true even if the sale occurs in different years but within the two-year time constraint.  Treas. Reg. §1.121-1(b)(3)(ii)(c).  Also, when computing the maximum limitation for the gain exclusion, the sale of the principal residence is excluded before any gain for the sale of the vacant land. Treas. Reg. §1.121-1(b)(3)(ii). 

For land that is eligible to be included with the residence, how much can be included?  It depends.  Land that contains a garden for home use and land that is landscaped as a yard can be included.  Also, local zoning rules might be instructive.  This all means that it’s a fact-based analysis.  There is no bright-line rule.  IRS rulings and caselaw illustrate that point. 

Written Farm Lease Expires by its Terms; No Holdover Tenancy

A recent case from Kansas illustrates how necessary it is to pay attention to the terms of a written farm lease.  Under the facts of the case, the plaintiff entered into a written farm lease with a landowner on January 10, 2018.  The purpose of the lease was the maintenance and harvesting a hay crop on the leased ground.  By its terms, the lease terminated on December 31, 2018, and contained a provision specifying that the parties could mutually agree in writing to extend the lease.  However, the parties did not extend the lease and it expired as of December 31, 2018.

In 2019, the landowner sold the farm to a third-party buyer.  After the sale, but before the buyer took possession, the plaintiff had the hay field fertilized.  During the summer of 2019, the new landowner hired the defendant to cut and bale the hay, which the defendant ultimately completed late one night. However, early the next morning the plaintiff entered the property and took some of the hay after it was harvested and baled.  The new owner called law enforcement and the plaintiff was informed not to return to the property.  But the plaintiff returned to the property and took more hay.  The plaintiff was criminally charged for multiple offenses.  Ultimately, the plaintiff received a diversion in lieu of prosecution for the charges (against the new owner’s wishes) and was required to provide restitution and perform community service.

The plaintiff claimed that he was entitled to the hay bales because he had a verbal lease and tried to tender a rent check after removing the bales.  The landowner refused to cash the check and moved cattle onto the hay ground.  The plaintiff sued for breach of contract, breach of duty of good and fair dealing, and tortious interference with a contract or business relationship.  The trial court rejected all of the claims and dismissed the case as a matter of law on the basis that the plaintiff did not have a valid lease after 2018.  The trial court denied a motion to reconsider.  On appeal, the appellate court affirmed noting that the lease had not been extended in writing and a holdover tenancy did not exist.  As for monetary damages, the new landowner recovered $27,000 from the plaintiff.  Thoele v. Lee, 2023 Kan. App. Unpub. LEXIS 381 (Kan. Ct. App. Sept. 15, 2023).

October 30, 2023 in Business Planning, Contracts, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)

Sunday, October 29, 2023

Ag Law and Tax Topics – Miscellaneous Topics

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

What if TCJA Isn’t Extended?

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

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

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

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

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

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

Buying Farmland with a Growing Crop

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

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

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

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

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

What is Livestock?

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

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

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

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

Partition of Farmland

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

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

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

Crop Insurance Proposal

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

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

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

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

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

Veterinarian’s Lien

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

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

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

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

Digital Assets and Estate Planning

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

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

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

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

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

Conclusion

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

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

Sunday, September 24, 2023

Hunting Use Agreements and Recreational Entrants – Legal Issues

Overview

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

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

The Property Interest Involved

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

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

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

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

Elements of a Hunting Use Agreement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liability Issues

Numerous states have enacted agritourism legislation designed to limit landowner liability to those persons engaging in an “agritourism activity.”  Typically, such legislation protects the landowner (commonly defined as a “person who is engaged in the business of farming or ranching and provides one or more agritourism activities, whether or not for compensation”) from liability for injuries to participants or spectators associated with the inherent risks of a covered activity.  The statutes tend to be written very broadly and can apply to such things as corn mazes, hayrides and even hunting and fishing activities.

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

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

Conclusion

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

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

Monday, August 21, 2023

Current Developments and Issues in Agricultural Law and Taxation

Overview

The legal, tax and economic issues are many and varied that face farmers and ranchers as well as the businesses and other professionals that work in the agricultural industry.  In today’s blog article, I look at some recent developments and issues of importance.

Adverse Possession/Prescriptive Easement

Easement issues arise frequently in agriculture.  Often the easement involves access to a landlocked parcel.  In those situations, the law will imply an easement from prior use or necessity, or by prescription.  An implied easement may arise from prior use if there has been a conveyance of a physical part of the grantor's land (hence, the grantor retains part, usually adjoining the part conveyed), and before the conveyance there was a usage on the land that, had the two parts then been severed, could have been the subject of an easement appurtenant to one and servient upon the other, and this usage is, more or less, “necessary” to the use of the part to which it would be appurtenant, and “apparent.”  An easement implied from necessity involves a conveyance of a physical part only of the grantor's land, and after severance of the tract into two parcels, it is “necessary” to pass over one of them to reach any public street or road from the other.  No pre-existing use needs to be present.  Instead, the severance creates a land-locked parcel unless its owner is given implied access over the other parcel.

Acquiring an easement by prescription is analogous to acquiring property by adverse possession.  If an individual possesses someone else's land in an open and notorious fashion with an intent to take it away from them, such person (known as an adverse possessor) becomes the true property owner after the statutory time period (typically anywhere from 10 to 21 years) has expired.  For an easement by prescription to arise, the use of the land subject to the easement must be open and notorious, adverse, under a claim of right, continuous and uninterrupted for the statutory period.  But, unlike adverse possession, there is no exclusivity requirement (except for the usage of the easement that is unique to the claimant) for acquiring a prescriptive easement.  That’s because the claimant is not claiming ownership of the property involved, just use.  Others may also be able to use the eased area without interfering with the claimant’s prescriptive easements. 

That last point is one that I have harped on for years – particularly in Kansas because the Kansas courts, frankly, have confusingly blurred the lines between adverse possession and prescriptive easement.  I have always tried to point out to my law students the difference between the two concepts and why the difference matters for farm clients.  Well, finally, the Kansas Supreme Court has cleared the mess up in Kansas by issuing an opinion as if it were straight from my books, seminars, extension meetings, classes and all. 

Here's a summary of the case:

Pyle v. Gall, 531 P.3d 1189 (Kan. 2023)

The parties disputed the location of the property line between their tracts.  The plaintiff routinely planted crops up to what the plaintiff believed to be the property line, but that planting interfered with the crop farming plans of the defendant’s tenant.  The plaintiff also regularly used a portion of the defendant’s field as a road to access the plaintiff’s crops.  In 2015, the defendant offered to sell the disputed area to the plaintiff and told the plaintiff to stop accessing the plaintiff’s crops via the defendant’s field.  Each party hired surveyors, but the surveyors reached different conclusions as to the property line. In March of 2016, the defendant built a fence based on the property line that the defendant’s surveyor found, which was 17 feet beyond what the plaintiff believed to be the property line. In March 2017, the plaintiff sued to quiet title to the field up to the crop line he farmed to by adverse possession and sought either a prescriptive easement or easement by necessity. 

The trial court held that the plaintiff had adversely possessed the land in dispute and had acquired a prescriptive easement across the defendant’s property.  On appeal, the appellate court upheld the trial court’s determination that the plaintiff had acquired the strip in question by adverse possession.  The plaintiff had used the property for the statutory timeframe in an open, exclusive and continuous manner upon belief of true ownership.  Use by others for recreational purposes, the appellate court reasoned, did not negate the exclusivity requirement because the use was infrequent compared to the plaintiff’s farming activity on the disputed land.  However, the appellate court reversed the trial court on the prescriptive easement issue because both the plaintiff and the defendant used the alleged area on which a prescriptive easement was being asserted.  Thus, the plaintiff had not used the easement exclusively.  The appellate court remanded to the trial court the issue of whether an easement by necessity had arisen because the trial court had not considered the issue.  Pyle v. Gall, No. 123,823, 2022 Kan. App. Unpub. LEXIS 242 (Kan. Ct. App. Apr. 29, 2022).

Note:  The appellate court’s opinion last year gave me more fodder for criticism of the blurring of prescriptive easement and adverse possession concepts/requirements.  There simply is no exclusivity requirement with respect to a prescriptive easement except what is unique to the party claiming a prescriptive easement.  A prescriptive claimant is not asserting ownership, but a particular usage of a portion of the owner’s property.  Others may also assert usage that is unique to themselves that doesn’t conflict with the claimant’s usage.

On further review, the Kansas Supreme Court reversed.  The Court clarified that there is no exclusivity requirement as an element for claiming a prescriptive easement (other than what is unique to the claimant).  The Court noted that the other elements for establishing a prescriptive easement are that the usage must be open, continuous for a statutory period (15 years in Kansas) and adverse to the true owner’s exclusive right of possession.  The Court stated that, “Exclusivity in the context of adverse possession is different than exclusivity in the context of prescriptive easements.”  So, a prescriptive easement exists if the landowner doesn’t substantially interrupt the prescriptive claimant’s use of the land during the statutory (15 years in Kansas) timeframe.  It doesn’t matter if the claimant failed to exclude all others from the contested area. 

Based on the facts of the case, while others used the subject area no one who owned or possessed the area in question substantially interrupted the plaintiff’s access to his field.  The easement area was being used by multiple people each for their own unique purposes. No one else used it as a corridor to access the plaintiff’s field.  How the contested area was used was the key.  The plaintiff successfully asserted a prescriptive easement for access to his field.

Texas Adverse Possession Case

Parker v. Weber, No. 10-16-00446-CV, 2023 Tex. App. LEXIS 2210  (Tex. Ct. App. Apr. 4, 2023)

This case involved adjoining property owners and a disputed 20.62 acres.  The defendant acquired his tract in 1958 and the plaintiff bought the adjoining tract and the 20.62 acres in 2014.  The seller of the 20.62 acres would not convey the tract via a warranty deed because of his understanding that there was some dispute about ownership of the acreage.  The plaintiff knew that there was a dispute about the title of the 20.62 acres, but claimed he didn’t know the defendant claimed title to it.  The defendant claimed title by adverse possession, pointing out that he had rebuilt and maintained the existing fence (which was first built in 1903), and had grazed cattle on his ranch and the disputed 20.62-acre tract. 

The appellate court determined that the evidence was sufficient to conclude that the fence was a “designed enclosure” rather than simply a “casual fence” (one that existed before either adjoining owner owned their tract).  The court also noted that the 20.62 acres was contiguous with the defendant’s larger ranch property, and he operated both tracts as a single cattle grazing unit.  The defendant had continued this usage since 1959 (which easily satisfied the applicable 25-year requirement) and made the fence his own by rebuilding and maintaining it.  Neighbor testimony established that the general view of the community was that the defendant owned the 20.62-acre property.  The appellate court also rejected the plaintiff’s argument that the defendant could not adversely possess the property because he didn’t pay taxes on the disputed tract.  The failure to pay taxes, the appellate court noted, lacked probative value.     

Grain Storage Costs

The cost of storing grain at an elevator could be at an all-time high in the near future.  How might it impact your farming business and what can you do about it? According to a report from CoBank’s Knowledge Exchange, higher grain storage costs caused by higher interest rates, an inverted futures market and higher labor, insurance and operational costs could also mean lower cash grain bids and wider basis levels.  The elevators’ cost of borrowing has risen, and crop prices are high, so to alleviate the pressure, elevators raise storage costs.  Based on USDA’s marketing year average prices, the interest-related cost of storing grain is up 21 percent for corn, 42 percent for soybeans, and 50 percent for wheat.  The situation is especially tough for co-op elevators because their business is to buy and market their members’ grain – they must carry inventory even if the cost has gone up.  And all of this is going on while farmers are facing higher input costs.  So, lower bids for outputs and higher costs for inputs is not a good scenario for farmers. 

So, what can you do to minimize risk?  One thing is to examine your strategy for using forward and deferred payment contracts. Another is to see whether you are optimizing your depreciation alternatives and your use of the commodity futures market.

Update on Proposition 12 Fallout (the EATS Act)

In the wake of the U.S. Supreme Court’s decision in the California Proposition 12 case, legislation has been introduced in both the U.S. House and Senate entitled the “Ending Agricultural Trade Suppression Act (EATS Act).  The EATS Act attempts to limit the power of states to establish their own standards for agricultural products. The primary objective of the law is to prevent states from enforcing regulations on animal products that are produced outside their borders and then imported for sale within the state.  The law is the current version of a bill introduced several years ago by Congressman Steve King.  The King legislation and the EATS Act are designed to prioritize economic incentives for the production of agricultural products and avoid states from legislating their ”morals” on other states and let consumers decide the ag products they wish to purchase (assuming products are appropriately labeled).

 It is possible that the legislation could be included in the next Farm Bill.  Animal rights groups oppose the legislation.   

August 21, 2023 in Real Property, Regulatory Law | Permalink | Comments (0)

Saturday, July 8, 2023

Coeur d’ Alene, Idaho, Conference – Twin Track

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

Speakers

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

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

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

The speakers for the ag law track are as follows:

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

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

Who Should Attend

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

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

Sponsorship

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

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

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

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

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

Sunday, June 11, 2023

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

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

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

Miscellaneous Agricultural Law Topics

Proper Tax Reporting of 4-H/FFA Projects

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

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

The Importance of Checking Beneficiary Designations

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

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

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

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

Liability Release Forms – Do They Work?

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

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

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

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

Equity Theft

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

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

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

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

The Climate, The Congress and Farmers

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

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

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

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

Secure Act 2.0 Errors

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

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

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

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

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

Implications of SCOTUS Union Decision on Farming Businesses

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

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

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

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

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

Digital Grain Contracts

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

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

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

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

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

Thursday, April 20, 2023

Bibliography – First Quarter of 2023

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

Bankruptcy

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

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

Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith

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

Business Planning

Summer Seminars

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

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

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

Civil Liabilities

Top Ag Law and Tax Developments of 2022 – Part 1

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

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

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

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

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

Contracts

Top Ag Law and Developments of 2022 – Part 2

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

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

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

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

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

Environmental Law

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

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

Top Ag Law and Developments of 2022 – Part 2

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

Top Ag Law and Developments of 2022 – Part 3

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

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

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

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

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

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

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

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

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

Estate Planning

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

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

Happenings in Agricultural Law and Tax

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

Summer Seminars

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

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

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

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

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

The Marital Deduction, QTIP Trusts and Coordinated Estate Planning

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

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

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

Income Tax

Top Ag Law and Developments of 2022 – Part 3

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

Top Ag Law and Developments of 2022 – Part 4

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

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

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

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

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

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

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

Deducting Residual (Excess) Soil Fertility

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

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

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

Happenings in Agricultural Law and Tax

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

Summer Seminars

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

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

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

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

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

Real Property

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

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

Happenings in Agricultural Law and Tax

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

Adverse Possession and a “Fence of Convenience”

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

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

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

Abandoned Rail Lines – Issues for Abutting Landowners

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

Regulatory Law

Top Ag Law and Developments of 2022 – Part 2

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

Top Ag Law and Developments of 2022 – Part 4

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

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

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

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

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

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

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

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

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

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

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

Foreign Ownership of Agricultural Land

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

Abandoned Rail Lines – Issues for Abutting Landowners

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

Secured Transactions

Priority Among Competing Security Interests

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

Water Law

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

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

Happenings in Agricultural Law and Tax

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

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

Saturday, March 25, 2023

Abandoned Rail Lines – Issues for Abutting Landowners

Overview

Federal law has established a procedure that a railroad must go through when abandoning a rail line and its corridor.  49 U.S.C. §10903.  In the 1970s, the Congress specified that before abandonment can be completed, other entities can intervene to preserve the corridor for future use.  16 U.S.C. §1247(d).  This process creates numerous issues for farmers, ranchers and other rural landowners along the corridor. 

A couple of recent cases highlighting the issues that can arise for adjacent property owners when a rail line is abandoned – it’s the topic of today’s post.

“Railbanking” – Background

The railbanking process allows a railroad to negotiate with another entity which would then assume the financial and managerial responsibility for the corridor by operating a recreational trail on it.  See, e.g., Presault v. Intertstate Commerce Commission, 494 U.S. 1 (1990).  But, before the trail operator can start negotiations with the railroad, it must file a railbanking petition.  See 49 C.F.R. §1152.29(a).  The trail operator must state that it is willing to assume full responsibility for managing the right-of-way and assume any legal liability for the transfer or use of the right-of-way.  The trail operator also must pay any and all taxes on the right-of-way.  In addition, the trail operator must acknowledge that the land will remain subject to possible reconstruction and reactivation of the right-of-way for rail service.  Once these certifications are made, then the trail group can negotiate with the railroad.  Any agreement that is struck is then submitted to the Surface Transportation Board (STB) which will then issue a Notice of Interim Trail Use (NITU).  The NITU allows the railroad to discontinue service without abandonment and allows the trail operator to use the corridor for use as a recreational trail. 

The issuance of a NITU can result in a taking of property owned by the original grantor of the corridor easement.  See, e.g., Presault v. Interstate Commerce Commission, 494 U.S. 1 (1990).  That’s because it’s often the case that the railroad merely owns an easement and not an outright fee simple.  In that situation, state law commonly provides that the easement is to revert (go back) to the abutting property owner when the railroad ceases operation.  But, because interim trail use under the railbanking program is a discontinuance rather than an abandonment, the easement doesn’t revert to the abutting landowners.  A taking may also occur if the original easement grant to the railroad under state law is not broad enough to allow for a recreational trail.  When a trail is operated in that situation, it’s a taking of a new easement requiring compensation under the Fifth Amendment.  See, Caquelin v. United States, 959 F.3d 1360 (Fed. Cir. 2020). 

Recent Cases

Central Kansas Conservancy, Inc., v. Sides, 56 Kan. App. 2d 1099, 44 P.3d 337 (2019), rev. den., No. 119,605, 2019 Kan. LEXIS 527 (Kan. Sup. Ct. Dec. 19, 2019), cert. den. sub. nom., Sides v. Central Kansas Conservancy, Inc., 140 S. Ct. 2741 (2020). 

In this case, the Union Pacific Railroad acquired a right-of-way over a railroad corridor that it abandoned in the mid-1990s. At issue in the case was a 12.6-mile length of the abandoned line between McPherson and Lindsborg, Kansas. NITU was issued in the fall of 1995. The corridor was converted into a trail use easement under the National Trails System Act. In 1997, Union Pacific gave the plaintiff a "Donative Quitclaim Deed" to the railroad’s easement rights over the corridor, with one-quarter mile of it running through the defendant’s property at a width of 66 feet. Pursuant to a separate agreement, the plaintiff agreed to quit claim deed its rights back to the railroad if the railroad needed to operate the line in the future. By virtue of the easement, the plaintiff intended to develop the corridor into a public trail.

In 2013, the plaintiff contacted the defendant about developing the trail through the defendant’s land. The defendant had placed machinery and equipment and fencing in and across the corridor which they refused to remove. In 2015, the plaintiff sued to quiet title to the .75-mile corridor strip and sought an injunction concerning the trail use easement over the defendant’s property. The defendant admitted to blocking the railway with fencing and equipment, but claimed the right to do so via adverse possession or by means of a prescriptive easement. The defendant had farmed, grazed cattle on, and hunted the corridor at issue since the mid-1990s. The defendant also claimed that the plaintiff had lost its rights to the trail because it had failed to complete development of the trail within two years as the Kansas Recreational Trail Act (KRTA) required.

In late 2016, the trial court determined that the two-year development provision was inapplicable because the Interstate Commerce Commission had approved NITU negotiations before the KRTA became effective in 1996. The trial court also rejected the defendant’s adverse possession/prescriptive easement arguments because trail use easements are easements for public use against which adverse possession or easement by prescription does not apply.

During the summer of 2017 the plaintiff attempted work on the trail. When volunteers arrived, the defendant had placed equipment and a mobile home on the corridor preventing any work. The plaintiff sought a "permanent prohibitory injunction and permanent mandatory injunction." The defendant argued that he had not violated the prior court order because "[a]ll the Court ha[d] done [was] issue non-final rulings on partial motions for summary judgments, which [were], by their nature, subject to revision until they [were] made final decisions." Ultimately, the trial court granted the plaintiff’s request for an injunction, determined that the defendant had violated the prior summary judgment order, but also held that the plaintiff had not built or maintained fencing in accordance with state law.

On appeal, the appellate court partially affirmed, partially reversed, and remanded the case. The appellate court determined that the defendant did not obtain rights over the abandoned line via adverse possession or prescriptive easement because such claims cannot be made against land that is held for public use such as a recreational trail created in accordance with the federal rails-to-trails legislation. The appellate court also determined that the plaintiff didn’t lose rights to develop the trail for failing to comply with the two-year timeframe for development under the KRTA. The appellate court held that the KRTA two-year provision was inapplicable because a NITU was issued before the effective date of the KRTA. However, the appellate court determined that the plaintiff did not follow state law concerning its duty to maintain fences. The appellate court held that Kan. Stat. Ann. §58-3212(a) requires the plaintiff to maintain any existing fencing along the corridor and maintain any fence later installed on the corridor. In addition, any fence that is installed on the corridor must match the fencing maintained on the sides of adjacent property. If there is no fencing on adjacent sides of a landowner’s tract that abuts the corridor, the plaintiff and landowner will split the cost of the corridor fence equally.

The appellate court remanded the case for a determination of the type and extent of fencing on the defendant’s property, and that the plaintiff has the right to enter the defendant’s property to build a fence along the corridor. Any fence along the corridor is to be located where an existing fence is located. If no existing fence exists along the corridor, the corridor fence is to be located where the plaintiff’s trail easement is separated from the defendant’s property.

The Kansas Supreme Court declined to review the case, and the U.S. Supreme Court later decline to grant certiorari. 

Behrens, et al. v. Heintz, et al., 59 F. 4th 1339 (Fed. Cir. 2023)

This case involved a 144.3-mile rail line in Missouri that had been in operation for over 100 years.  The railroad had acquired the necessary easements for the corridor via condemnations and agreements with the abutting landowners.  The easements were granted to the railroad in 1901 and 1902.  18 of the 19 deeds containing the easements did not limit the use of the easement for railroad purposes.  Ultimately, a successor-railroad to the easements sought to discontinue service and abandon the railway.  In late 2014, the Missouri Department of Natural Resources filed a request to intervene in the abandonment proceeding seeking to utilize the easement for interim trail use on the corridor.  Five years later, the STB was notified that a trail use agreement had been executed in accordance with the NITU and the STB regulations.

The plaintiffs, owners of the abutting land along the corridor, filed a Takings claim in 2015 in the U.S. Court of Federal Claims on the basis that the railroad originally acquired easements under Missouri law rather than a fee interest and that the easements were for railroad purposes only.  Accordingly, the plaintiffs claimed that the conversion of the easements to recreational trail use was beyond the scope of the easements and constituted a Taking.  The Court of Federal Claims agreed that the property interest acquired involved easements, but that interim trail use was permissible.  Upon reconsideration, the Court of Federal Claims again held that no Taking had occurred because the scope of the easements was broad enough to allow for trail use.  The plaintiffs appealed.

On appeal, the appellate court determined that the railroad had, under Missouri law, undisputedly acquired easements and not fee simple interests.  See Mo. Rev. Stat. §388.210(2).  As to the scope of the easements, the appellate court determined that Mo. Rev. Stat. §388.210(2) explicitly limited the scope of the 18 easements to “railroad purposes” only.  That statute, the appellate court noted, defines the purposes of such voluntary grants to railroads as the ones involved in the case “to aid in the construction, maintenance and accommodation of the railroads.”  The appellate court noted that the Missouri Supreme Court had construed this language to mean that such grants are for “all railroad purposes.”  Brown v. Weare, 152 S.W.2d 649 (Mo. Sup. Ct. 1941).

On the takings issue, the appellate court determined that the issue was whether the trail use and railbanking were “railroad purposes” and, as a result, within the scope of the easements.  On that issue, the appellate court cited a Missouri case finding that trail use is not included in the meaning of “railroad purposes.”  Boyles v. Missouri Friends of Wabash Trace Nature Trail, Inc., 981 S.W.2d 644 (Mo. Ct. App. 1998).  The appellate court also cited one of its own prior opinions holding that trail use is not a railroad purpose under other states’ laws.  See, e.g., Presault v. Interstate Commerce Commission, 100 F.3d 1525 (Fed. Cir. 1996)(construing Vermont law); Toews v. United States, 376 F.3d 1371 (Fed. Cir. 2004)(construing California law).  The appellate court also noted that the speculative possibility that the trail would return to rail use did not fall within the scope of the easements that were granted for railroad purposes.  There simply was no realistic possibility the future rail use would occur.  Likewise, the appellate court noted that the easements were granted for the benefits of the railroads to operate a rail line, not the benefit of “some future unidentified entity that might receive the easement in the future.”  The preservation of a tract of land (corridor) for future rail use under the National Trail System Act does not transform an interim trail use into a “railroad purpose.” 

Accordingly, the appellate court held that a Fifth Amendment Taking had occurred, reversed the Court of Federal Claims, and remanded the case to that court for a determination of damages on the Takings issue.

Conclusion

Recreational trails operating on abandoned rail lines present numerous legal issues for abutting landowners.  The constitutional takings issue is a major, but other issues can arise involving fencing, trash and liability for personal injury.  Expect this issue to remain an important one for landowners along abandoned railroad corridors.

March 25, 2023 in Real Property, Regulatory Law | Permalink | Comments (0)

Sunday, March 19, 2023

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

Overview

A common interpretive problem in oil and gas conveyances and leases arises when the owner of a fractional mineral interest either conveys or reserves a fraction using unclear language.  One way that can happen is when a “double fraction” clause is used.  That’s a clause that creates uncertainty as to whether the grant or reservation is a fraction of what the grantor owns or a fraction of the whole interest.  For instance, if Bubba owns an undivided ½ interest in minerals and conveys “an undivided ½ interest in the minerals,” does that mean that Bubba conveyed a ½ interest in all of the minerals or simply ½ of Bubba’s ½?  This interpretive issue can also arise when mineral interests are devised from a decedent’s estate.  It also occurs when a conveyancing instrument refers to both “minerals” and a “royalty” or blends the two concepts in the same instrument.

The interpretive issues associated with a double fraction clause recently came up again in a Texas case.  That case involved the construction of a 1924 deed containing a mineral reservation clause, and it could have wide-ranging impact on oil and gas titles in Texas and, perhaps, elsewhere. 

The meaning of a “double-fraction” clause and the impact on future oil and gas conveyances – it’s the topic of today’s post.

Royalty Deed Interpretation

A royalty interest is an interest in a share of production, or the value or proceeds of production, free of the costs of production, when and if there is production.  It is usually expressed as a fraction.  But, the way those fractional interests are expressed can create confusion, whether the fraction is expressed as a “fraction of royalty” or as a “fractional royalty.” 

Fractional royalty interests.  With a fractional royalty interest, the owner is entitled to a share of gross production, free of cost in an amount determined by the fractional size of the owner’s interest.  The share of production the owner is entitled to does not “float” with royalties of differing amounts reserved in an oil and gas lease.  An expression of a fractional royalty clause is, for example, “an undivided 1/16th royalty interest of any oil, gas, or minerals that may hereafter be produced.” 

Fraction of royalty interest.  With a fraction or royalty interest, the amount of production that is associated with the interest will “float” depending on the royalty reserved in an oil and gas lease.  The owner gets a share in production equal to a fraction multiplied by the royalty reserved in an oil and gas lease.  Examples of such a clause would be, “1/16th of all oil and gas royalty” or “an undivided ½ interest in and to all of the royalty” or “1/2 of 1/8th of the oil, gas and other mineral royalty that may be produced.”       

Double fractions.  Complexity increases when a double fraction is used to describe the royalty interest.  For instance, “1/4th of 1/8th of all royalty…” is an example of a double fraction clause.  Many courts utilize the multiplication approach and would conclude that such a clause would convey a 1/32nd interest.  Indeed, for conveyance or reservation clauses drafted before the 1970s, the general assumption was that the royalty provided for in an oil and gas lease would always be 1/8th.  Thus, a right to “1/4th of royalty” would be the same thing as the right to 1/4th of the 1/8th royalty reserved in an oil and gas lease – a 1/32nd royalty.  But, since the 1970s, mineral owners have often been able to negotiate a wider range of royalties in mineral leases with many of them larger than 1/8th (often ranging from 10 percent to over 30 percent).  This resulted in the double fraction clause creating confusion as to the drafter’s intent.  This confusion can arise not only in oil and gas conveyancing instruments, but also in bequests from a decedent’s estate.

Bequests.  In Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2015), the decedent executed a will in 1947 that divided three tracts of real estate among her three children.  The will also distributed her mineral estates on the tracts using double fraction language – “each of my children shall have and hold an undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas or other minerals in or under that may be produced from any of said lands… and should there be any royalty sold during my lifetime then [the three children], shall each receive one-third of the remainder of the unsold royalty.”  The question was whether the double fraction language fixed the heirs devised royalty at 1/24th with any negotiated royalty above 1/8th passing to the current fee owner, or if the decedent intended her heirs to receive 1/3 of all future royalties, regardless of what the royalty fraction was.  The heirs of two of the decedent’s children sought 1/3rd  of the 1/5th royalty in a new oil and gas lease, and the successors of the other child claimed that the successors of the siblings were only entitled to 1/3rd of 1/8th and that any additional royalty belonged to the fee simple owner. 

Note:  The Hysaw case involved the “estate-misconception theory.” That theory reflects the historic prevalent belief that, in entering into an oil-and-gas lease, a lessor retained only a 1/8 interest in the minerals rather than the entire mineral estate in "fee simple determinable.”  In turn, for decades afterwards, many lessors referred to their entire interest in the mineral estate with the simple use of “1/8.”  One court has described the “estate misconception” theory as follows: “In earlier times, many landowners labored under the misconception that when they leased their mineral estate to an operator, they only retained 1/8th of the minerals in place, rather than a fee simple determinable with the possibility of reverter in the entirety of the mineral estate...  Therefore, when the landowner conveyed a mineral interest to a third party in land that was already subject to a lease, he would often use a fraction of 1/8 to express what interest he intended to convey in his possibility of reverter.  Since a landowner in reality retains a full 8/8 interest in the reverter, the application of the estate misconception doctrine has tremendous consequences.”  Greer v. Shook, 503 S.W.3d 571 (Tex. Ct. App. 2016).

The Texas Supreme Court determined that the outcome should turn on the decedent’s intent.  Based on the evidence, the Court found that intent to be to equally divide the royalties among the decedent’s children.  Accordingly, the Court held that the decedent had devised a 1/3rd fraction of a royalty interest (regardless of the amount of that royalty) to each of her children.  In other words, the decedent has used the phrase "one-eighth royalty" as a shorthand phrase for the entire royalty interest that a lessor could retain under a mineral lease. She had left a floating 1/3rd  royalty to each child.

Recent Texas Case  

Van Dyke v. The Navigator Group, No. 21-0146,

2023 Tex. LEXIS 144 (Tex. Sup. Ct. Feb. 17, 2023)

Facts.  This case culminated a decade-long battle over a mineral interest reservation involving a double fraction and accumulated royalties of approximately $44 million.  In 1924, the Mulkeys deeded their ranch to White and Tom reserving “one-half of one-eighth” of all minerals and mineral rights.   After the conveyance, both parties conducted themselves as if they believed that they each owned one-half of the mineral interest, as did all successors-in-interest.

 In 2012, an energy company drilled a well and paid both the successors-in-interest to the Mulkeys (the “Mulkey parties”) and the successors-in-interest to White and Tom (the “White parties”) equal one-half shares.  The White parties filed a trespass-to-try-title action, claiming that the 1924 deed reserved only a 1/16th (1/2 of 1/8th) of the minerals to the Mulkey parties, and that the White parties owned fifteen-sixteenths of the minerals.  The Mulkey parties claimed that the interest reserved was one-half of the total mineral estate, and that the reference to one-eighth of the minerals was a term of art under the “estate misconception” theory.  Under that theory (which had been forgotten over time), one-eighth was commonly believed to mean the entire mineral estate. 

Alternatively, the Mulkey parties claimed entitlement to one-half of the minerals because of the long history of the original parties and the successors-in-interest acting as if each party owned one-half of the mineral interest.

Trial and appellate courts.  The trial court held that the 1924 deed unambiguously reserved a one-sixteenth interest in the Mulkey parties.  The appellate court affirmed, also concluding that the “estate misconception theory” did not apply because “the deed did not contain any conflicting provisions requiring harmonization and the subject property was not burdened by an oil and gas lease at the time of conveyance.”   

Texas Supreme Court.  On further review, the Texas Supreme Court reversed and remanded.  The Court noted that in the early 20th century that landowners commonly retained a one-eighth royalty interest under an oil and gas lease and that, over time, “1/8th” became synonymous with the mineral interest itself or as a proxy for the customary royalty of 1/8th.  In essence, it became a term of art.  The Court looked to Hysaw where, as noted, the Court held that each child received a “floating one-third interest in the royalty” based on what the evidence showed was the decedent’s intent.  While, as the Court noted, using “1/8” to mean the entire mineral estate is rebuttable, such a rebuttal can only be accomplished with evidence from the document itself suggesting basic multiplication be applied. The Court found that while “1/8” was a term of art in use at the time the deed was drafted to mean the entire mineral estate, there was nothing else in the deed to rebut this meaning.  As a result, the Court held that the Mulkey grantors did in fact reserve a full 1/2 interest in the mineral estate.

Note:  The Court also noted that the court of appeals misapprehended how the estate-misconception theory is applied to instruments, such as the 1924 deed. Instead of looking to whether the lack of inconsistencies in an instrument require harmonization, courts should first assume that the specific use of a double fraction was intentional (a rebuttable presumption) and if the document lacks anything that could rebut that presumption (inconsistencies) then the intended (historical) use of the double fraction stands. For instance, the instrument in this case included the use of a double fraction (“1/2 of 1/8”) and there was no evidence to rebut the presumption that the parties intended “1/2 of 1/8” to mean “1/2 of the mineral estate.” As for the land not being encumbered by a lease at the time of the deed, the Court stated that the theory’s “relevance has never depended on the considerations that the court of appeals identified.”

The Court went on to examine the presumed-grant doctrine – a common law form of adverse possession.  The Court noted three elements which must be satisfied for the presumed grant doctrine to prevail: “(1) a long-asserted and open claim, adverse to that of the apparent owner; (2) nonclaim by the apparent owner; and (3) acquiescence by the apparent owner in the adverse claim.” The Court noted that a ninety-year history existed between the parties in which “conveyances, leases, ratifications, division orders, contract, probate inventories, and a myriad of other instruments” were recorded, thus providing notice of the interests owned by both parties. Likewise, for nearly a century, both parties had stipulated multiple times to the one-half ownership of the mineral estate.  Indeed, in a 1950 conveyance, White had recited that he only held an undivided one-half interest in the oil, gas, and other minerals on the ranch. Based on all of this evidence and the conduct of the parties over time, the Court held that the Mulkey parties conclusively established their ownership under the presumed grant doctrine.

What Would Happen In Kansas?

In Kansas, a royalty deed is normally interpreted in accordance with the evidence concerning usage over time by the parties involved along with other relevant evidence.  But, in Bellport v. Harrison, 255 P. 52 (Kan. 1927), the Court held that “royalty” must be construed in accordance with its “well-known meaning” and that it was not appropriate to look to custom to define the term “royalty.”  The Court also concluded that the term “royalty” cannot have a meaning different from its “well-known” meaning as a result of usage.  The case involved a sale by Harrison of “one-half of [a] royalty.”  The receipt stated, “Received of A.J. Bellport, $2,400.00 payment for 1/16 royalty…”.  The mineral interest was leased at the time and provided for payment of a 1/8th royalty.  Harrison asserted that Bellport acquired one-half of Harrison’s 1/8th royalty, but Bellport claimed he purchased one-half of the mineral interest and that the reference to “1/16th  royalty” conveyed to him a one-half mineral interest entitling him to one-half of the 1/8th royalty. 

The trial court, based on custom, agreed with Bellport but the Kansas Supreme Court reversed.  Arguably, the Court believed that the usage was unreasonable and not probative.  The Court made a clear distinction between a royalty interest and a mineral interest.  A “royalty” refers to a right to share in the production of oil and gas at severance.  A royalty is personal property and does not include a perpetual interest in and to oil and gas in and other minerals in and under the land.  Conversely, a “mineral interest” means an interest in and to oil and gas in and under the land and constitutes the present ownership of an interest in real property.  See, e.g., Shepard v. John Hancock Mutual Life Insurance Co., 368 P.2d 19 (Kan. 1962). 

As a result, a Kansas court facing a double-fraction set of facts in a conveyancing instrument would likely focus on facts that enlighten the true nature of the instrument based on the language utilized rather than what the parties call it.  This appears to be somewhat like the approach of the Texas Supreme Court taken in Van Dyke.  The “estate misconception” theory is merely instructive, perhaps, but is not dispositive.  It might also be safe to say that is the approach in Texas.  See, e.g., Concord Oil Co. v. Pennzoil Exploration & Production Co., 966 S.W.2d 451 (Tex. 1998). 

Conclusion

The Van Dyke ruling, at least in Texas, will probably have longstanding effect on oil and gas titles.  The term “one-eighth” in a double fraction clause refers to the entire estate absent evidence to the contrary that proves otherwise and satisfies the presumed-grant doctrine.  In any event, practitioners would do well to refrain from using double-fraction clauses.

March 19, 2023 in Contracts, Real Property | Permalink | Comments (0)

Tuesday, March 14, 2023

Adverse Possession and a "Fence of Convenience"

Overview

When land is possessed by someone that knows the possession violates the ownership rights of someone else, the concept of adverse possession can come into play.  It’s a legal principle that says a person without legal title to a tract of land may acquire legal ownership based on continuous possession absent the true owner’s permission.  If the true owner does not exercise their right to eject the violator after a certain period of time, the true owner will be prevented form excluding the violator and a new title to the tract at issue could be issued to the violator who then would be the actual owner of the tract.  But there are elements that must be established to successfully assert an adverse possession claim.  In addition, certain facts can defeat an adverse possession claim - one of those is that a fence that is not on the actual legal boundary is not a "fence of convenience."

Adverse possession and a "fence of convenience" – it’s the topic of today’s post.

Background

Each state has its own adverse possession statute and associated timeframe after which adverse possession can be claimed.  The elements of an adverse possession claim also vary from state to state.  One common requirement is that the party claiming adverse possession must assert a claim that is “hostile” to the true owner’s rights.  That certainly means that the permission for the usage must not have been granted.  It also means that the adverse possessor knows that their asserted possession is against the true owner’s rights.

Here's a sampling of cases involving adverse possession and a brief description of the court’s holding:

  • Gibbons v. Lettow, 42 P.3d 925 (Or. Ct. App. 2002) (no acquisition by adverse possession because continuous use of land not made for statutory period).
  • Ebenhoh v. Hodgman, 642 N.W.2d 104 (Minn. Ct. App. 2002) (acquisition of adverse possession occurred because planting of crops on disputed strip for over 40 years demonstrated sufficient continuous use exclusive of any other party).
  • Davis v. Chadwick, 55 P.3d 1267 (Wyo. 2002) (fence used continuously for over 50 years for grazing of cattle and horses; survey revealed that fence not on boundary, but fence held to be boundary under theory of adverse possession; fence not fence of convenience);
  • Kosok v. Fitzpatrick, No. 2008AP2351, 2009 Wisc. App. LEXIS 883 (Wisc. Ct. App. Nov. 17, 2009)(plaintiff established statutory elements of adverse possession of disputed strip of land for 20 years; fence remnants were sufficient to “raise a flag of hostility” and were, in fact, treated as the boundary between the properties).
  • Wallace v. Pack, et al., No. 12-0277, 2013 W. Va. LEXIS 1012 (W. Va. Sup. Ct. Oct. 3, 2013)(trial court properly determined that defendants acquired 28 acres via adverse possession; uses of disputed tract included enclosing portions with fencing, keeping livestock, picking berries, picnicking, etc.).

Fence of “Convenience”

Sometimes a fence is not located on the actual border (partition) between adjacent parcels simply because it is not convenient to construct it there because of the terrain or natural obstructions that make it practically impossible to locate the fence on the actual property boundary.  A fence that the adjoining landowners know is not on the actual surveyed line can give rise to a comparable concept – the “doctrine of practical location.”  The usage of a particular line by the adjoining owners for the statutory timeframe (the same length of time that applies to adverse possession), can lead to that line becoming the actual legal boundary.  The question in this situation is whether the fence is a “fence of convenience.”  The fence is simply placed where it is convenient for the adjoining landowners.  In that situation, adverse possession cannot apply in states that have a "hostility" requirement as part of an adverse possession statute or the common law.  This precise issue came up in a recent court opinion from Wyoming.

Lyman v. Childs, 2023 WY 16 (2023)

The defendants asserted that the plaintiffs were trespassing and took action to eject them.  In response, the plaintiffs filed an adverse possession claim against the defendant for approximately 100 acres of property deeded to the defendant, but on the plaintiffs’ side of a fence.  The trial court found the fence was not built in accordance with the surveys because it was a fence of convenience - it was the best place to build the fence given the terrain. It was not meant to delineate the property line.

Note:  When a fence is one of convenience then it is presumptively permissive, so an adverse possession claim will fail.

The trial court ruled in favor of the defendants and the plaintiffs appealed. The Supreme Court of Wyoming began by noting that the plaintiffs had presented a prima facie case for adverse possession – they had actual possession of the property on their side of the fence; the use was notorious (open and obvious to the defendant) given their use of the property and the no trespass signs they posted; the no trespass signs were enough to show an exclusive use; and the combination of the fencing, signs, and use showed hostility towards the true owner; and the use had been continuous and uninterrupted for the required 10 years needed to establish adverse possession. Once the plaintiffs showed a prima facie case of adverse possession, the burden of disproving adverse possession falls on the defendants.

The showing that a fence is one of convenience establishes permissive use, which defeats the hostility requirement for adverse possession. The Supreme Court explained that several factors are considered when determining if a fence is one of convenience including: the fence’s physical appearance; whether the fence meanders; whether the fence avoids natural barriers and obstacles; whether trees or bushes are used as fencing material; changes in elevation on the deeded boundary compared to the fence line; and the type of land the fence is dividing, among other things. The trial court found the fence did not run-in straight lines, avoided natural barriers, and changed direction for no reason other than terrain. The fence often used trees or bushes as posts and the irregularity showed it was not meant to depict the property line. The trial court gave more credit to the defendants’ expert who stated that the fence was likely built in this manner to reduce costs of building along the actual boundary line, because the easier the fence was to build the cheaper it would be. It would have been cheaper to just follow the easiest path than to require the builders to try to build the fence on along the rough terrain.

The Supreme Court noted that the trial court is to be given considerable deference when weighing testimony and found no reason to interfere with the trial court’s decision to provide more weight to the defendants’ expert. The plaintiffs asserted that if the fence was one of convenience, then the defendant needed to prove that each disputed parcel was enclosed by a fence of convenience rather than a boundary fence. The Supreme Court rejected this argument because the plaintiffs had relied on a case which contained differing facts than this one where the fence was all used for the same purpose of blocking ground and not used to be a boundary for a homeplace. The plaintiffs could not prove any parcel was used differently than the next. The plaintiffs also claimed that the trial court allowed a layman’s testimony to be utilized as expert testimony when it should not have been because the layman had not been to the site in over 30 years.  However, the Supreme Court noted that the fence had not moved over that 30-year timeframe and, as a result, the layman’s testimony was valid.   Finally, the plaintiffs claimed that they used the property in such a manner that the use had to been seen as hostile. The Supreme Court held the plaintiffs failed to record any deeds that showed they owned the property, so there was no notice to the defendants on the record. Further, using the ground for grazing or recreational purposes is not a hostile use in Wyoming.

The Supreme Court affirmed the trial court’s decision that the defendants had lawfully ejected the plaintiffs off the property because the plaintiffs did not own the property and held the plaintiffs did trespass. The plaintiffs began to trespass once they were aware of the defendants’ notice to not come onto the disputed property any longer, but they continued to do.  

Conclusion

A fence that is not actually on the surveyed property boundary may can give rise to a quiet title action either under an adverse possession theory or the theory of boundary by acquiescence.  However, those theories will not apply if the fence is merely a fence of convenience.  That determination will be based on the particular facts of each situation.

March 14, 2023 in Real Property | Permalink | Comments (0)

Saturday, March 11, 2023

Happenings in Agricultural Law and Tax

Overview

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

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

Dominant Estate’s Water Drainage Permissible.

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

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

Mortgage Interest Deduction Disallowed 

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

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

Charitable Deduction Case Will Go to Trial on Numerous Issues

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

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

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

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

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

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

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

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

Document Filed with FSA Not a Valid Lease

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

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

Conclusion

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

March 11, 2023 in Estate Planning, Income Tax, Real Property, Water Law | Permalink | Comments (0)

Sunday, March 5, 2023

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

Overview

In January, the U.S. Supreme Court agreed to hear a case from the U.S. Court of Appeals for the Eighth Circuit involving a Minnesota homeowner that failed to keep current on the payment of her property taxes.  Ultimately, title to her home was forfeited to the State under the Minnesota statutory forfeiture procedure.  The county cancelled her tax debt of $15,000 and then sold the home (a condominium) to a private party for $40,000, but did not remit the $25,000 surplus back to her. 

The case highlights the issue of “home equity theft” that is possible in some states and raises concerns among farmers and ranchers as to whether it is possible that the same principle could apply

Home equity “theft” and the potential application to farms and ranches – it’s the topic of today’s post

Background

Equity in a home or a farm is the difference between the value of the home or farm and the remaining mortgage balance.  Equity is a primary source of wealth for many owners.  Indeed, the largest asset value for a farm or ranch family is in the equity wrapped up in the land.  In the non-farm sector, primary residences account for 26 percent of the average household’s assets.  Equity is a valuable asset.  It can be borrowed against or converted into cash and invested in other assets or used to pay debts.  Home equity, however, is also subject to seizure to settle tax debt – within the confines of the constitution.  Certainly, the government has the constitutional power to tax property and seize property to pay delinquent taxes on that property.  But, is it constitutional for the government to retain the proceeds of the sale of seized (forfeited) property after the tax debt has been paid?  That’s the question presently before the U.S. Supreme Court.

The Minnesota Case

Presently, 12 states allow the government to keep the surplus equity proceeds of a sale.  Minnesota is one of those, along with Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Nebraska, New Jersey, New York, South Dakota, and Oregon.   The Minnesota case, Tyler v. Hennepin County, 26 F. 4th 789 (8th Cir. 2022), cert. granted, 143 S. Ct. 644 (2023), involved the Minnesota statutory forfeiture procedure that applies when property taxes remain unpaid.  Property taxes are a perpetual lien against the property.  Minn. Stat. §272.31  Property taxes that the not paid during the year they are due become delinquent on January 1 of the following year.  Minn. Stat. §279.03, subdiv. 1.  Each year the county must file a delinquent tax list.  Once a property is listed, a lawsuit is brought against the properties on which the delinquent taxes are owed.  Id. §279.05.  Property owners with outstanding taxes receive multiple notices of both the delinquent tax list and the legal action.  Id.  §279.06, 279.09, 279.091.  If the owner fails to respond, a judgment is entered against the property.  Id. §279.16.  The county then buys the property for the amount of the unpaid taxes (plus penalties, costs and interest).  At that point, title to the property vests in the State subject to statutory redemption rights.  Id. §280.41.  During the statutory redemption period (typically three years) the former owner may redeem the property for the amount of the delinquent taxes, penalties, costs and interest.  During the redemption period, the county must notify the taxpayer of the right to redeem.  If Id.  §§281.01, 281.02 and 281.17.  the redemption right is not exercised, a final forfeiture occurs which vests “absolute title” in the State and cancels all taxes, penalties, costs, interest, and special assessments against the property.  Id.  §§281.18, 282.07.  Even after the “final forfeiture” the owner has six months to apply to buy the forfeited property.  Id. §282.41.  But, Minnesota law specifies that if the county ultimately sells the property the former owner cannot recover any proceeds of the sale that exceed the tax debt.  In other words, the State takes the former owner’s equity in the property. 

This is precisely what happened in Tyler.  Hennepin County followed the statutory forfeiture procedure, the homeowner didn’t redeem her condominium within the allotted timeframe and the state ultimately sold the property and bagged the proceeds – including the homeowner’s equity in the property.    

The homeowner sued, claiming that Hennepin County violated the Constitution’s Takings Clause (federal and state) by failing to remit the equity she had in her home.  She also claimed that the county’s actions amounted to an unconstitutional excessive fine, violated her due process and constituted an unjust enrichment under state law.  The trial court dismissed the case and the Eighth Circuit affirmed finding that she lacked any recognizable property interest in the surplus equity in her home.  In so holding, the appellate court noted the detailed statutory forfeiture procedure under Minnesota law.  The appellate court also affirmed the trial court’s conclusion that the retention of the surplus equity by the state did not constitute an excessive fine under either the federal or state Constitutions. 

Other States

Wisconsin.  The result in Tyler could have also happened in Wisconsin but in 2022 state law changed to bar the state from retaining equity obtained in forfeiture proceedings.  Wis. Act. 216 (2022).  In 2020, the Michigan Supreme Court determined that the state’s retention of equity in a forfeiture action was an unconstitutional taking of private property.  Rafaeli, LLC v. Oakland Cty., 505 Mich. 429, 952 N.W.2d 434 (2020).  The case involved an 83-year-old man who failed to pay $8.41 in property taxes and the county sold his home for $24,500 to pay the debt and kept the balance. 

Massachusetts.  A small alpaca farmer in Massachusetts filed a claim on January 10, 2023, to argue that the local town unconstitutionally took a $310,000 profit from the sale of his farm to pay a $60,000 property tax debt.   A study by Ralph D. Clifford at the University of Massachusetts School of Law at Dartmouth found that Massachusetts “steals” almost $60,000,000 in equity from taxpayers annually.  (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3086247). 

Note:  In some instances, a private company will buy a property that has a delinquent tax debt and attach interest to it at the statutory rate – 16 percent in Massachusetts.  The company then lets the interest accrue for three years (the statutory redemption timeframe) and then notifies the real homeowner one last time what they can pay to get their home back – including the interest charge.

Nebraska.  In 2018, the Nebraska Supreme Court determined that 480-acre farm near North Platte worth $1..1 million had been properly acquired for $50,000 in delinquent taxes.  Wisner v. Vandelay Invs., L.L.C., 300 Neb. 825, 916 N.W.2d 698 (2018).  The owner was a 94-year-old woman in a nursing woman with arguable reduced mental capacity. One of her sons was named as an agent under a power of attorney who then assigned his duties to a trust officer at a local bank.  The son assumed that the bank was paying the property taxes on the farm, but the bank never received any property tax notices and, thus, didn’t pay any property taxes.  The taxes became delinquent, and a private company ultimately acquired the tax certificate for the farm and, after the required three-year redemption period, sent notice of intent to foreclose to the address where the owner had previously received her property tax statements.  The notice was unclaimed which led the company to publish notice in a local newspaper for three consecutive weeks.  Ultimately, the firm acquired the tax deed to the property. 

The son sought to void the tax deed, claiming that the company didn’t comply with the statutory notice requirements (the paper wasn’t circulated in the entire county) and that the three-year redemption period should have been extended to five years on account of the owner’s mental condition.  However, the Nebraska Supreme Court disagreed, holding that the son failed to overcome the presumption that the publication of notice was sufficient or that his mother had a mental condition sufficient to extend the statutory redemption period.  A dissenting judge classified the majority’s opinion as a “windfall that borders on the obscene.”    

Note:  In the wake of the Wisner decision, the Nebraska Unicameral changed the requirements for service of notice when applying for a tax deed.  Neb. Rev. Stat. §77-1832 was amended to provide that service of the notice is to be by personal or residential service on a person in actual possession of the property and on the person whose name the title to the real property appears of record who can be found in Nebraska.  If personal or residential service is not possible, certified mail or designated delivery service can be used.  In addition, the amendment specifies that certified mail or designated delivery service must be provided to every encumbrancer of record found by the title search.   Only if a “diligent inquiry” fails to find the person(s) entitled to notice can notice then be by publication in the newspaper of general circulation designated by the county board.

Application can be made with the county treasurer for a tax deed if redemption has not been made.  The county treasurer will issue the tax deed if, among other things, an affidavit proving service of notice is provided.  If service of notice was by publication an affidavit of the publisher, manager, or newspaper employees is required.  Also required to be provided is a copy of the notice and an affidavit of the purchaser (or the purchaser’s assignee) of the tax certificate.

Conclusion

Home (and farm) equity theft tends to bear more heavily on those that can least afford to hire legal assistance or qualify for legal aid (because they own a home or a farm).  So, the lack of cases on the matter may underrepresent the extent of the problem.  Also, each state bars a lender from keeping the proceeds of a forfeiture sale but, as noted above, not every state bars the government or a private company (that is not a lender), from keeping the surplus equity from a forfeiture sale. 

Will the Supreme Court block the state and local governments (and private companies) from keeping surplus equity.  We will soon find out.

March 5, 2023 in Real Property | Permalink | Comments (0)