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
Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith
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)
Civil Liabilities
Top Ag Law and Tax Developments of 2022 – Part 1
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Contracts
Top Ag Law and Developments of 2022 – Part 2
Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Environmental Law
Here Come the Feds: EPA Final Rule Defining Waters of the United States – Again
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Estate Planning
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Happenings in Agricultural Law and Tax
Summer Seminars
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?
Common Law Marriage – It May Be More Involved Than What You Think
The Marital Deduction, QTIP Trusts and Coordinated Estate Planning
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Income Tax
Top Ag Law and Developments of 2022 – Part 3
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Deducting Residual (Excess) Soil Fertility
Deducting Residual (Excess) Soil Fertility – Does the Concept Apply to Pasture/Rangeland? (An Addendum)
Happenings in Agricultural Law and Tax
Summer Seminars
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?
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Real Property
Equity “Theft” – Can I Lose the Equity in My Farm for Failure to Pay Property Taxes?
Happenings in Agricultural Law and Tax
Adverse Possession and a “Fence of Convenience”
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Abandoned Rail Lines – Issues for Abutting Landowners
Regulatory Law
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Foreign Ownership of Agricultural Land
Abandoned Rail Lines – Issues for Abutting Landowners
Secured Transactions
Priority Among Competing Security Interests
Water Law
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Happenings in Agricultural Law and Tax
April 20, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
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)
Monday, January 30, 2023
Bibliography - July Through December 2022
Overview
After the first half of 2022, I posted a blog article of a bibliography of my blog articles for the first half of 2022. You can find that bibliography here: Bibliography – January through June of 2022
Bibliography of articles for that second half of 2022 – you can find it in today’s post.
Alphabetical Topical Listing of Articles (July 2022 – December 2022)
Bankruptcy
More Ag Law Developments – Potpourri of Topics
Business Planning
Durango Conference and Recent Developments in the Courts
Is a C Corporation a Good Entity Choice For the Farm or Ranch Business?
What is a “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
Federal Farm Programs: Organizational Structure Matters – Part Three
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
Civil Liabilities
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Contracts
Minnesota Farmer Protection Law Upheld
Criminal Liabilities
Durango Conference and Recent Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/20Ag Law Summit
https://lawpr22/07/durango-conference-and-recent-developments-in-the-courts.html
Environmental Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
More Ag Law Developments – Potpourri of Topics
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Estate Planning
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Modifying an Irrevocable Trust – Decanting
Farm and Ranch Estate Planning in 2022 (and 2023)
Social Security Planning for Farmers and Ranchers
How NOT to Use a Charitable Remainder Trust
Recent Cases Involving Decedents’ Estates
Medicaid Estate Recovery and Trusts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/medicaid-estate-recovery-and-trusts.html
Income Tax
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal With Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
What is “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Declaring Inflation Reduced and Being Forgiving – Recent Developments in Tax and Law
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas
More Ag Law Developments – Potpourri of Topics
IRS Audits and Statutory Protection
https://lawprofessors.typepad.com/agriculturallaw/2022/10/irs-audits-and-statutory-protection.html
Handling Expenses of Crops with Pre-Productive Periods – The Uniform Capitalization Rules
When Can Depreciation First Be Claimed?
Tax Treatment of Crops and/or Livestock Sold Post-Death
Social Security Planning for Farmers and Ranchers
Are Crop Insurance Proceeds Deferrable for Tax Purposes?
Tax Issues Associated With Easement Payments – Part 1
Tax Issues Associated With Easement Payments – Part 2
How NOT to Use a Charitable Remainder Trust
Does Using Old Tractors Mean You Aren’t a Farmer? And the Wind Energy Production Tax Credit – Is Subject to State Property Tax?
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2022/08/ag-law-summit.html
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Regulatory Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Federal Farm Programs – Organizational Structure Matters – Part One
Federal Farm Programs – Organizational Structure Matters – Part Two
Federal Farm Programs: Organizational Structure Matters – Part Three
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Minnesota Farmer Protection Law Upheld
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs?
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Water Law
More Ag Law Developments – Potpourri of Topics
January 30, 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)
Monday, December 5, 2022
Ag Law Developments in the Courts
Overview
It’s been a while since I did a blog article on recent court developments involving farmers, ranchers rural landowners and agribusinesses. I have been on the road just about continuously for the last couple of months and nine more events remain between now and Christmas. But, let me take a moment today (and later this week) to provide a summary of some recent court cases involving agriculture.
Recent court opinions involving agriculture – it’s the topic of today’s post.
Jumping Mouse Habitat Designation Upheld
Northern New Mexico Stockman’s Association, et al. v. United States Fish and Wildlife Service, 494 F.Supp.3d 850 (D. N.M. 2020), aff’d., 30 F.4th 1210 (10th Cir. 2022)
In 2014, the U.S. Fish and Wildlife Service (USFWS) listed the New Mexico Meadow Jumping Mouse as an endangered species based on substantial habitat loss and fragmentation from grazing, water management, drought and wildfire. Accordingly, in 2016, the USFWS designated 14,000 acres along 170 miles of streams and waterways in New Mexico, Arizona and Colorado as critical habitat for the mouse. The U.S. Forest Service erected fencing around some streams and watering holes in the Santa Fe and Lincoln National Forests that were in the designated area The plaintiffs, two livestock organizations, with members that graze cattle in those national forests, sued in 2018 claiming that the USFWS failed to sufficiently consider the economic impact of the critical habitat designation. The trial court dismissed the case, finding that the USFWS was justified in its decision. The trial court also determined that the USFWS need not compensate the plaintiffs for the reduction in value of the plaintiffs’ water rights. The trial court reasoned that the USFWS need not consider all of the economic impacts associated with the mouse’s listing when designating critical habitat, only the incremental costs of the designation itself. The court cited the nine-month annual hibernation period of the mouse giving it only a short time to breed and gain weight for the winter and, as such, the mouse’s habitat needed to remain ideal with tall, dense grass and forage around flowing streams in the designated area. On appeal, the appellate court affirmed. The appellate court held that the assessment method of the USFWS for determining the economic impacts of the critical habitat designation on the water rights of the plaintiffs’ members was adequately considered, and that the USFWS had reasonably supported its decision not to exclude certain areas from the critical habitat designation.
Court Reduces Dicamba Drift Damage Award; Case Continues on Punitive Damages Issue
Hahn v. Monsanto Co., 39 F.4th 954 (8th Cir. 2022)
The plaintiff claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) conspired to develop and market dicamba-tolerant seeds and dicamba-based herbicides. The plaintiff claimed that the damage to the peaches occurred when dicamba drifted from application to neighboring fields. The plaintiff claimed that the defendants released the dicamba-tolerant seed with no corresponding dicamba herbicide that could be safely applied. As a result, farmers illegally sprayed an old formulation of dicamba herbicide that was unapproved for in-crop, over-the-top, use and was "volatile," or prone to drift. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the claims based on the Missouri Crop Protection Act, noting that civil actions under this act are limited to “field crops” which did not include peaches. The trial court did not dismiss the civil conspiracy claim based on concerted action by agreement but did dismiss the aiding and abetting portion of the claim because that cause of action is no recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant. Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019). The jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and the both defendants had done so for 2017 to the present. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict in light of the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020). BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
On appeal, the appellate court affirmed the trial court on the causation issue noting that the defendant retained direct contact with the farmers and exercised some degree of control over their actions. As such, the defendant was aware of the foreseeable consequences that could come from not controlling the farmers’ actions more closely. On the compensatory damage issue, the defendant argued that compensatory damages should be measured by the difference in the value of the orchard before and after the damage. The appellate court disagreed, noting that such a calculation only applied when the victim is the owner of the land and not a tenant as was the plaintiff. Thus, compensatory damages were properly measured by lost profits. The defendant argued the damages were speculative, but the court found that Bader Farms had provided years of financial statements to show the usual costs and profits associated with farming the orchard. The appellate court determined that there was no doubt the defendant had full control over the critical aspects of the project. In 2007, BASF had relinquished their rights to the seed technology to the defendant, so they could not control something they had no rights to. The appellate court also affirmed the finding that BASF and Monsanto had engaged in a civil conspiracy by agreeing to sell products unlawfully and enabling the widespread use of a product that was illegal to spray during the growing season. As members of the civil conspiracy, BASF was correctly found to be severally liable for the damages. The appellate court also found that Bader Farms provided clear and convincing evidence that the companies had acted with reckless indifference, but the two had different degrees of culpability. The trial court should have assessed the punitive damages of the Monsanto and BASF separately. Thus, the appellate court affirmed in part and reversed and remanded the punitive damages judgment to the trial court.
Court Decides to Resolve Property Dispute by Requiring Parties to Use the Existing Property Line
Barlow v. Saxon Holdings Trust, No. SD37361, 2022 Mo. App. LEXIS 657 (Mo. Ct. App. Oct. 21, 2022)
The plaintiff and her husband purchased land in 1987 by warranty deed that included the language, “running thence Southwesterly along the fence 40 rods.” At the time the plaintiff purchased the property, a fence that ran north to south existed and the plaintiff believed and acted like she owned the land up to that fence. The defendant purchased the neighboring land in 2011 and executed a warranty deed that included the language, “beginning at the NE corner of the NE ¼ of said Section 23 and running SW 40 rods.” In the spring of 2020, the defendant hired a surveyor who informed the defendant that his property extended onto the plaintiff’s property to the “40-rod line.” The defendant put up an electric fence on the disputed property to claim it. In response the plaintiff hired a surveyor who determined the property line was on the original fence line. The plaintiff sued to quiet title. The trial court found ambiguity between the deeds and resolved the ambiguity in favor of the plaintiff and held the plaintiff had adversely possessed the land. The defendant appealed. The appellate court recognized that the deeds individually did not show patent ambiguity, but the difference between the two on the location of property line did create an ambiguity. The appellate court determined that one way to resolve the ambiguity would be to have the parties continue to occupy the land the way they had in accordance with one of the deeds or constructions. This was the trial court’s approach, and the appellate court affirmed the trial court on this point. The appellate court also noted that the trial court had found the plaintiff’s surveyor credible, and that credibility of a witness was a determination to be left to the trial court’s discretion that the appellate court would not disturb. The appellate court affirmed the trial court’s resolution of the deed in favor of the plaintiff and determined it need not address the adverse possession claim.
Oil and Gas Lease on Disputed Property Invalidates Adverse Possession
Cottrill v. Quarry Enterprises, LLC, No. 2022 CA 00011, 2022 Ohio App. LEXIS 3191 (Ohio Ct. App. Sept. 27, 2022)
The plaintiff claimed that she had successfully adversely possessed the defendant’s property by receiving title to the property in 1971 from her mother and caring for the land by mowing and maintaining it and using it for recreational events for herself and family. The trial court granted summary judgment for the defendant, finding that the plaintiff failed to establish exclusive possession over the land due to an existing oil and gas lease that the defendant had executed. The plaintiff appealed, claiming that the lease did not invalidate her exclusive use. To show exclusive use, the plaintiff did not have to be the only person who used the land but needed to be the only person who asserted their right to possession over the land. The appellate court found that the oil and gas that existed on the property began in 1958. For the entirety of the time that the plaintiff claimed she had adversely possessed the property, the oil and gas company had the right of possession over the land in dispute, invalidating the plaintiff’s claim.
December 5, 2022 in Civil Liabilities, Environmental Law, Real Property, Regulatory Law | Permalink | Comments (0)
Thursday, October 6, 2022
More Ag Law Developments – Potpourri of Topics
Overview
The courts have continued to issue decisions of relevance to farmers, ranchers and rural landowners. In today’s post, I take a look at some of them from around the country. From property rights to income tax to bankruptcy to herbicide crop damage and landowners disputing over drainage – it’s covered below.
Court Says Public Has Right to Use Private Riverbeds
Adobe Whitewater Club of N.M. v. N.M. State Game Comm'n., No. S-1-SC-38195, 2022 N.M. LEXIS 34 (N.M. Sup. Ct. Sept. 1, 2022)
The plaintiffs, various environmental and recreation groups, sued the New Mexico State Gaming Commission (Commission), claiming a regulation of the Commission violated the public’s right to use parts of New Mexico’s rivers. In 2017, the Commission, promulgated a regulation that outlined a process for landowners to obtain a certificate allowing them to close public access to segments of public water flowing over private property. The plaintiffs challenged the regulation as unconstitutional. Article XVI, Section 2 of the New Mexico state constitution states, “the unappropriated water of every natural stream, perennial or torrential, within the state of New Mexico, is hereby declared to belong to the public.” The issue was whether the public’s right to use the public waters included the right to use the privately owned waterbeds. The New Mexico Supreme Court determined that riverbeds were considered navigable waterways and were subject to the “public trust doctrine.” The private landowners along the riverbed intervened in the lawsuit and claimed the public would be considered trespassers on their land and they could exclude the trespassers. The Court disagreed, finding that the public has the right to use private land when reasonably necessary to gain access to or enjoy public rivers. The Court stated, “A determination of navigability only goes to who has title to the bed below the public water, not to the scope of the public use.” As such the court concluded that the public had access to such rivers to float, wade, fish and engage in other recreational activities that would have a minimal impact on the rights of private property owners. In addition, the Court held that such waters are and always have been public. Accordingly, the Court invalidated the Commission’s regulation.
Retained Ownership of Minable Surface Negates Conservation Easement Deduction.
C.C.A. 202236010 (Sept. 9, 2022)
The Chief Counsel’s office of IRS has taken the position that a conservation easement donation is invalid if the donor owns both the surface estate of the land burdened by the easement as well as a qualified mineral interest that has never been separated from the surface estate, and the deed retains any possibility of surface mining to extract subsurface minerals. In that instance, the conservation easement doesn’t satisfy I.R.C. §170(h). The IRS said the result would be the same even if the donee would have to approve the surface-mining method because the donated easement would not be donated exclusively for conservation purposes in accordance with I.R.C. §170(h)(5). The IRS pointed out that Treas. Reg. §1.170A-14(g)(4) states that a donated easement does not protect conservation purposes in perpetuity if any method of mining that is inconsistent with the particular conservation purposes of the contribution is permitted at any time. But, the IRS pointed out that a deduction is allowed if the mining method at issue has a limited, localized impact on the real estate and does not destroy significant conservation interests in a manner that can’t be remedied. Surface mining, however, is specifically prohibited where the ownership of the surface estate and the mineral interest has never been separated. On the specific facts involved, the IRS determined that the donated easement would not be treated at being made exclusively for conservation purposes because the donee could approve surface mining of the donor’s subsurface minerals.
Family Farms Not Part of Bankruptcy Estate.
Ries v. Archer (In re Archer), Nos. 17-20045-RLJ-7, 19-02001, 2022 Bankr. LEXIS 2250 (Bankr. N.D. Tex. Aug. 12, 2022)
A chapter 7 trustee sought a declaration that certain farm ground was a part of the bankrupt estate. The debtors, a married couple, had eight children, who all but one became medical doctors. The debtors had funded their children’s education throughout their lives with funds derived from the family farm. They owned 14 sections of land in Moore County, Texas, (northwest Texas) comprising what was referred to as the “Moore County Farm.” Although, the deed from 1988 for the land listed the defendant’s children’s IRA as the grantee-buyer of the land, the children did not have IRAs at the time or played any part in purchasing the land. The children were not given any right to manage or operate the Moore County Farm so long as the debtors were mentally competent. Beginning in 1998, the USDA and CRP program began making payments to some of the defendant’s children and in 2007 farmers who rented land from the Moore County Farm began to pay some of the children. The children began to open accounts and lines of credit associated with the expenses of the Moore County Farm. From 2005 to 2017, the debtors instructed some of their children to apply as “New Producers” to the Federal Crop Insurance Program. Through this program they were provided with favorable crop insurance as “managers” of a farm, but none of the children had managerial control. Ultimately, the children were charged with and convicted of insurance fraud. Along with the 1988 deed, the debtors executed a warranty deed for the Moore County Farm to some of the children in 2006 and later transferred the farm to the children’s IRAs. In 2008, one of the defendant’s children purchased 670 acres in Randall County, referred to as the “Randall County Farm”. The debtors ultimately had primary authority and control of the farming operations of the Randall County Farm along with the Moore County Farm and had full control over the finances and accounting of the farms. The children did pay for some of the expenses on the Randall County Farm, but overall, the debtors operated the two farms as one entity. There were no further legal issues until 2011 when one of the debtors’ cows was hit by a motorist who sustained serious injuries because of the accident and filed suit. The court awarded the man $8.95 million in damages to be paid by the debtors. The debtors then filed Chapter 7 bankruptcy. The bankruptcy court noted that the children had shared significant responsibilities over the Moore County Farm with their father and that their father wanted to pass the property to his children through the deeds. The court concluded that just because the debtors continued to run the farm did not mean they did not want to ultimately gift the land to the children. The bankruptcy trustee argued this was another scam set up by the family, but the court was not convinced given the common desire of parents to devise property to their children. The evidence showed that the debtors’ intent was for the children to own the farms and operate them for enjoyment. Based on these considerations, the court concluded that the Moore County Farm was not part of the bankruptcy estate. The trustee claimed that the Randall County Farm should have been a part of the estate. Because one of the children who purchased the land negotiated a conservation plan with the USDA, received CRP payments, and paid for the farm expenses, the child was the true owner of the Randall County Farm and could not be considered part of the bankruptcy estate.
FIFRA Doesn’t Preempt State-Based Warranty Claims
Kissan Berry Farm v. Whatcom Farmers Cooperative, et al., No. 82774-0-I, 2022 Wash. App. LEXIS 1766 (Wash. Ct. App. Sept. 6, 2022)
The plaintiffs, five state of Washington red raspberry farms, claimed that the use of herbicide Callisto in 2012 killed their berry plants causing more than $2.5 million in lost production for 2012 and two following crop years. Callisto’s use was recommended by an agronomist working on behalf of. the defendant. Callisto’s maker, Syngenta was also named in the suit. Callisto’s label stated that it was safe for use on red raspberries. The label also indicated that usage could result in some crop damage and that compensation for crop damage was limited to the price of the herbicide. The plaintiffs asserted that Syngenta and the agronomist had made various warranties that Callisto was safe for use on red raspberries. Syngenta’s position that the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) preempted the farmers’ claims. The trial court agreed on the basis that the plaintiffs’ claims would have required Syngenta to change the product label due to state law. The appellate court reversed based on Bates v. Dow Agrosciences LLC, 544 U.S. 431 (2005). Under Bates, state law cannot require a change to a federally approved label, but state-based claims for breach of warranty are not preempted. the Supreme Court found that a pesticide manufacturer who is found liable for state law breach of express warranty claims is not then induced to change their federally registered pesticide label.
Comparative Fault for Unmaintained Waterway
Watters v. Medinger, No. 21-1076, 2022 Iowa App. LEXIS 667 (Iowa Ct. App. Aug. 31, 2022)
The parties had been in various legal spats involving farmland for over a decade. The plaintiff owned farmland adjacent to the defendant that contained waterways. The plaintiff sued the defendant claiming the defendant altered his land in various ways causing extreme degradation and erosion along the plaintiff’s waterways. The trial court determined that the plaintiff was contributorily negligent for failing to maintain or mow around the waterways, which allowed for ragweed to grow. The ragweed destroyed the grass along the waterway, which meant the water would flood quicker than it would have if grass could absorb some of the moisture. The trial court found that the defendant’s construction of a new cattle shed and addition of drain tiles did cause damage to the plaintiff’s property, but the at that time the plaintiff had already stopped properly maintaining the waterway. The trial court awarded the plaintiff $2,000 in damages to repair the damage caused by the erosion. The plaintiff appealed claiming that the damage award was insufficient. The appellate court reviewed the plaintiff’s argument that the jury instruction was improper regarding comparative fault. The plaintiff tried to argue that he could not repair any part of the erosion until the drainage issues were solved. The appellate court held the plaintiff failed to address the failure to maintain the waterway before the draining issues arose. A farm tenant testified that the plaintiff’s property was already in “tough shape” before the defendant made any changes to his property. The appellate court held the comparative fault instruction was proper, because there was “a causal connection between the plaintiff’s fault and the claimed damages.” Further, the appellate court held the award of damages was sufficient because the jury settled on an amount within the range of evidence based on expert testimony. Just because the amount was at the low end of the range did not mean the amount was insufficient. The appellate court affirmed the trial court’s decision to deny the plaintiff’s motion for a new trial.
Conclusion
Agricultural law and taxation is a very dynamic discipline. There is never a dull moment -more fodder for my radio shows and TV interviews, and content for my books and seminars.
October 6, 2022 in Bankruptcy, Civil Liabilities, Environmental Law, Income Tax, Real Property, Water Law | Permalink | Comments (0)
Wednesday, September 14, 2022
Ag Law and Tax Developments
Overview
It’s been a while since I last did an case and ruling update. So, today’s post is one of several that I will post in the coming weeks.
Some recent developments in the courts and IRS – it’s the topic of today’s post.
Retained Ownership of Minable Surface Negates Conservation Easement Deduction
C.C.A. 202236010 (Sept. 9, 2022)
The Chief Counsel’s office of IRS has taken the position that a conservation easement donation is invalid if the donor owns both the surface estate of the land burdened by the easement as well as a qualified mineral interest that has never been separated from the surface estate, and the deed retains any possibility of surface mining to extract subsurface minerals. In that instance, the conservation easement doesn’t satisfy I.R.C. §170(h). The IRS said the result would be the same even if the donee would have to approve the surface-mining method because the donated easement would not be donated exclusively for conservation purposes in accordance with I.R.C. §170(h)(5). The IRS pointed out that Treas. Reg. §1.170A-14(g)(4) states that a donated easement does not protect conservation purposes in perpetuity if any method of mining that is inconsistent with the particular conservation purposes of the contribution is permitted at any time. But, the IRS pointed out that a deduction is allowed if the mining method at issue has a limited, localized impact on the real estate and does not destroy significant conservation interests in a manner that can’t be remedied. Surface mining, however, is specifically prohibited where the ownership of the surface estate and the mineral interest has never been separated. On the specific facts involved, the IRS determined that the donated easement would not be treated at being made exclusively for conservation purposes because the donee could approve surface mining of the donor’s subsurface minerals.
Use of Pore Space Without Permission Unconstitutional
Northwest Landowners Association v. State, 2022 ND 150 (2022)
North Dakota law provides that a landowner’s subsurface pore space can be used for oil and gas waste without requiring the landowner’s permission or the payment of any compensation. The plaintiffs challenged the law as an unconstitutional taking under the Fourth and Fifth Amendments. The trial court held that the law was unconstitutional on its face and awarded attorney’s fees to the plaintiff. On further review, the North Dakota Supreme Court determined that the plaintiffs had a property interest in subsurface pore space and that the section of the law specifying that the landowners did not have to provide consent to the trespassers to use the land unconstitutionally deprived them of their property rights as a per se taking. However, the Supreme Court determined that the section of the law allowing oil and gas producers to inject carbon dioxide into subsurface pore space was constitutional. The Supreme Court upheld the award of attorney fees.
Net Operating Loss Couldn’t Be Carried Forward
Villanueva v. Comr., T.C. Memo. 2022-27
The petitioner sustained a loss from the disposition of a condominium he owned as a rental property. He reported the date of the loss as August 2013, but a mortgage lender had foreclosed on the condo in May 2009 and the taxpayer lost possession on that date. The IRS denied the deduction on the basis that the petitioner had not claimed the loss on either an original or amended return which meant that there was no loss that could be carried forward. The Tax Court agreed with the IRS, noting that the Treasury Regulations for I.R.C. §165 provide that a loss is treated as sustained during the tax year in which the loss occurs as evidenced by a closed and completed transaction and fixed by identifiable events occurring in such taxable year. A loss resulting from a foreclosure sale is typically sustained in the year in which the property is disposed of, and the debt is discharged from the proceeds of the foreclosure sale. Thus, the Tax Court determined that the loss had occurred in 2009 and should have been claimed at that time where it could have then been carried forward.
Overtime Pay Rate Not Applicable to Construction Work on Farm
Vanegas v. Signet Builders, Inc., No. 21-2644, 2022 U.S. App. LEXIS 23206 (7th Cir. Aug. 19, 2022)
The plaintiff, the defendant’s employee, worked overtime in building a livestock fence for the defendant. The defendant refused to pay the plaintiff time and a half for overtime. The plaintiff sued the defendant to recover the extra wages. The defendant’s refusal was based on the plaintiff being an agricultural worker not entitled to overtime. The trial court agreed and dismissed the plaintiff’s claim. The plaintiff appealed. The appellate court looked to the language of 29 U.S.C. § 213(b)(12) and the work of the plaintiff to determine if the plaintiff would be considered an agricultural employee. The appellate court found the plaintiff’s work was carried out as a separately organized activity outside of the defendant’s agricultural operations. The plaintiff worked for the defendant, but he built the fence on his own without any aid from any of the farm employees. The appellate court noted that another indication the work would not be considered exempt is whether farmers typically hire someone out for the work at issue. If so, it could be an indication the work is separate from agricultural work and would qualify for overtime pay. The appellate court found the defendant failed to provide much evidence to show that the plaintiff worked with agricultural employees and did not show the work was commonly done by a farmer. The appellate court also reasoned that just because the plaintiff was given a visa for agricultural work did not mean his work for the defendant was agricultural. The appellate court reversed the trial court’s decision to dismiss the complaint.
Early Distribution “Penalty” is a “Tax” and Does Not Require Supervisor Approval
Grajales v. Comr., No. 21-1420, 2022 U.S. App. LEXIS 23695 (4th Cir. Aug. 24, 2022), aff’g., 156 T.C. 55 (2021)
The petitioner borrowed money from her pension account at age 42. She received an IRS Form 1099-R reporting the gross distributions from the pension of $9,025.86 for 2015. She didn’t report any of the amount as income in 2015. The IRS issued her a notice of deficiency for $3,030.00 and an additional 10 percent penalty tax of $902.00. The parties later stipulated to a taxable distribution of $908.62 and a penalty of $90.86. The petitioner claimed that she was not liable for the additional penalty tax because the IRS failed to obtain written supervisory approval for levying it under I.R.C. §6751(b). The Tax Court determined that the additional 10 percent tax of I.R.C. §72(t) was a “tax” and not an IRS penalty that required supervisor approval before it would be levied. The Tax Court noted that I.R.C. §72(t) specifically refers to it as a “tax” rather than a penalty and that other Code sections also refer to it as a tax. The appellate court affirmed.
U.S. Fish & Wildlife Service Can Regulate Ag Practices on Leased Land
Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022)
The plaintiffs sued the defendant, U.S. Fish and Wildlife Service, claiming the defendant violated environmental laws by regulating leased farmland in the Tule Lake and Klamath Refuge. The trial court granted summary judgment in favor of the defendant. The plaintiff appealed. The appellate court noted that the Kuchel Act and the Refuge Act allow the defendant to determine the proper land management practices to protect the waterfowl management of the area. Under the Refuge Act, the defendant was required to issue an Environmental Impact Statement (EIS) and Comprehensive Conservation Plan (CCP). The defendant did issue an EIS and CCP for the Tule Lake and Klamath Refuge area, which included modifications to the agricultural use on the leased land within the region. The EIS/CCP required the leased lands to be flooded post-harvest, restricted some harvesting methods, and prohibited post-harvest field work, which the plaintiffs claimed violated their right to use the leased land. The plaintiffs argued that the language, “consistent with proper waterfowl management,” within the Kuchel Act was “nonrestrictive” and was not essential to the meaning of the Act. The appellate court held it was improper to read just that portion of the Act without considering the rest of the Act to understand the intent. The appellate court found the Kuchel Act was unambiguous and required the defendant to regulate the leased land to ensure proper waterfowl management. The Refuge Act allows the defendant to regulate the uses of the leased land, but the plaintiffs argued the agricultural practices were a “purpose” rather than a “use” so the defendant could not regulate it under the Refuge Act. The appellate court found the agriculture on the leased land was not a “purpose” equal to waterfowl management. The appellate court also held the language of the act was unambiguous and determined that agricultural activities on the land was to be considered a use that the defendant could regulate. The appellate court affirmed the trial court’s award of summary judgment for the defendant.
Crop Salesman Sued for Ruining Relationship with Landowner
Walt Goodman Farms, Inc. v. Hogan Farms, LLC, No. 1:22-cv-01004-JDB-jay, 2022 U.S. Dist. LEXIS 134192 (W.D. Tenn. Jul. 28, 2022)
The plaintiff, a farm tenant, sued the defendant landlord and a third-party ag salesman. The plaintiff claimed that the salesman wrongly advised the landlord and encouraged the landlord to complain about the plaintiff’s farming practices. Specifically, the plaintiff’s claims against the salesman were for interference with contract, interference with business relationship, and fraud. The salesman moved to dismiss each claim, but the trial court denied the motion with respect to the contract interference and interference with business relationship claims. The trial court, however, dismissed the fraud claim involving the efficacy of corn seed.
Standard Default Interest Rate Not Unconscionable
Savibank v. Lancaster, No. 82880-1-I, 2022 Wash. App. LEXIS 1558 (Wash. Ct. App. Aug. 1, 2022)
The defendant obtained a loan from the plaintiff to purchase his father’s farm before the virus outbreak. The loan agreement stated that the interest rate would increase to 18 percent upon default. The defendant did default when the pandemic hit, and the plaintiff filed a foreclosure and repossession action against the plaintiff. The trial court ruled in favor the plaintiff. The defendant appealed and asserted the 18 percent default interest rate was unconscionable during a pandemic. During the appeal, the defendant claimed the plaintiff should have alerted the defendant to any better loan alternatives but failed to do so. The appellate court, affirmed, finding that the plaintiff had no contractual obligation to make the defendant aware of any better financing agreement. The appellate court also upheld the trial court’s finding that the 18 percent default interest rate was not unconscionable and was common for agricultural loans with other banks in the area. The appellate court also noted that the defendant had the opportunity to consult with a lawyer about the loan terms before signing. The loan terms were standard and straightforward, and the defendant failed to show any evidence as to how the virus caused his default or how it made the default interest rate unconscionable. In addition, the court noted that the defendant had stopped making loan payments before the virus began to impact the United States. The appellate court also held that the defendant failed to provide any evidence for an unconscionability defense.
Conclusion
I’ll post additional developments in a subsequent post.
September 14, 2022 in Civil Liabilities, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)
Sunday, September 11, 2022
September 30 Ag Law Summit in Omaha (and Online)
Overview
On September 30, Washburn Law School with cooperating partner Creighton Law School will conduct the second annual Ag Law Summit. The Summit will be held on the Creighton University campus in Omaha, Nebraska. Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30 and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Developments in agricultural law and taxation. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world. There have been several major developments involving agricultural that have come through the U.S Supreme Court in recent months. I will discuss those decisions and the implications for the future. Several of them involve administrative law and could have a substantial impact on the ability of the federal government to micro-manage agricultural activities. I will also get into the big tax developments of the past year, including the tax provisions included in the recent legislation that declares inflation to be reduced!
Death of a farm business owner. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections. The handling of tax attributes after death will be covered as will some non-tax planning matters when an LLC owner dies. There are also entity-specific issues that arise when a business owner dies, and Prof. Morse will address those on an entity-by-entity basis. The transition issue for farmers and ranchers is an important one for many. This session will be a good one in laying out the major tax and non-tax considerations that need to be laid out up front to help the family achieve its goals post-death.
Governing documents for farm and ranch business entities. After a morning break Dan Waters with Lamson Dugan & Murray in Omaha will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fence law issues. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
Farm economics. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an ag economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? How will the war in Ukraine continue to impact agriculture in the U.S.? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Online. The Summit will be broadcast live online and will be interactive to allow you the ability to participate remotely.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
September 11, 2022 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)
Monday, September 5, 2022
Bibliography – January through June of 2022
Overview
Periodically I post an article containing the links to all of my blog articles that have been recently published. Today’s article is a bibliography of my articles from the beginning of 2022 through June. Hopefully this will aid your research of agricultural law and tax topics.
A bibliography of articles for the first half of 2022 – it’s the content of today’s post.
Bankruptcy
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Other Important Developments in Agricultural Law and Taxation
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
Business Planning
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Intergenerational Transfer of the Farm/Ranch Business – The Buy-Sell Agreement
IRS Audit Issue – S Corporation Reasonable Compensation
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
Durango Conference and Recent Developments in the Courts
Civil Liabilities
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Agritourism
https://lawprofessors.typepad.com/agriculturallaw/2022/03/agritourism.html
Animal Ag Facilities and the Constitution
When Is an Agricultural Activity a Nuisance?
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Contracts
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Cooperatives
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Criminal Liabilities
Animal Ag Facilities and the Constitution
Is Your Farm or Ranch Protected From a Warrantless Search?
Durango Conference and Recent Developments in the Courts
Environmental Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
“Top Tan” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 3) – New Regulatory Definition of “Habitat” under the ESA
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
Estate Planning
Other Important Developments in Agricultural Law and Taxation
Other Important Developments in Agricultural Law and Taxation (Part 2)
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Family Settlement Agreement – Is it a Good Idea?
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Proposed Estate Tax Rules Would Protect Against Decrease in Estate Tax Exemption
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Ag Law (and Medicaid Planning) Court Developments of Interest
Joint Tenancy and Income Tax Basis At Death
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Income Tax
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Purchase and Sale Allocations Involving CRP Contracts
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What’s the Character of the Gain From the Sale of Farm or Ranch Land?
Proper Tax Reporting of Breeding Fees for Farmers
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Expense Method Depreciation and Leasing- A Potential Trap
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
income Tax Deferral of Crop Insurance Proceeds
What if Tax Rates Rise?
https://lawprofessors.typepad.com/agriculturallaw/2022/03/what-if-tax-rates-rise.html
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
IRS Audit Issue – S Corporation Reasonable Compensation
Missed Tax Deadline & Equitable Tolling
https://lawprofessors.typepad.com/agriculturallaw/2022/04/missed-tax-deadline-equitable-tolling.html
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Joint Tenancy and Income Tax Basis At Death
Tax Court Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2022/05/tax-court-caselaw-update.html
Deducting Soil and Water Conservation Expenses
Correcting Depreciation Errors (Including Bonus Elections and Computations)
When Can Business Deductions First Be Claimed?
Recent Court Decisions Involving Taxes and Real Estate
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
Tax Issues with Customer Loyalty Reward Programs
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal with Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Animal Ag Facilities and the Constitution
Recent Court Decisions Involving Taxes and Real Estate
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Tax Deal Struck? – and Recent Ag-Related Cases
Regulatory Law
The “Almost Top 10” of 2021 (Part 5)
https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-10-of-2021-part-5.html
The “Almost Top 10” of 2021 (Part 6)
https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-6.html
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Animal Ag Facilities and the Constitution
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Secured Transactions
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
Water Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Durango Conference and Recent Developments in the Courts
September 5, 2022 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, August 20, 2022
Ag Law Summit
Overview
Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30, and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Survey of ag law and tax. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world.
Tax issues upon death of a farmer. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections.
Farm succession planning drafting language. After a morning break Dan Waters, and estate planning attorney in Omaha, NE, will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fences and boundaries. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
The current farm economy and future projections. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
August 20, 2022 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)
Thursday, July 28, 2022
Tax Deal Struck? – and Recent Ag-Related Cases
Overview
Reports are that Senator Joe Manchin has come to an agreement with Senate leadership on tax legislation that is part of a larger package, termed the “Inflation Reduction Act of 2022.” It’s apparently part of the 2022 budget reconciliation bill which only requires a simple majority of the Senate to pass. What are the tax provisions that have been agreed to?
Proposed tax provisions apparently agreed to, and some recent ag-related court decisions – it’s the topic of today’s post.
Tax Agreement
Reports are that the agreed upon tax package includes a 15 percent corporate alternative minimum tax (AMT) applied to adjusted financial statement income of corporations with profits exceeding $1 billion. A corporation subject to the AMT would be able to claim net operating losses and tax credits against the AMT. In addition, a corporation subject to the AMT would be able to claim tax credits against the AMT as well as regular corporate tax for AMT paid in prior years to the extent the regular tax liability in any year exceeds 15 percent of the corporation’s adjusted financial statement income. The provision would be effective for tax years after 2022.
Also included in the agreement is a change in the tax treatment of carried interest (e.g., the share of profit that general partners receive to compensate them for managing a venture capital fund).
Another proposal would apply the net investment income tax (NIIT) of I.R.C. §1411 to all income. Presently this 3.8 percent tax (which was created as part of Obamacare) applies only to passive income above a threshold. Under the proposal, the additional 3.8 percent tax would apply to adjusted gross income over $400,000 (single) and $500,000 (mfj). This means that there is a substantial “marriage penalty.” In addition, the qualified business income deduction (QBID) of I.R.C. §199A is not part of a taxpayer’s AGI computation. In other words, AGI is not reduced by the 20 percent QBID – AGI is computed before accounting for the QBID. Thus, for a taxpayer that has taxable income at or below the threshold for application of the NIIT as a result of the QBID, the NIIT would be computed on AGI first.
Note: Applying the NIIT to adjusted gross income (including income from both passive and active sources) could result in a sizeable tax increase for many farmers – particularly dairy operations.
There are other tax provisions reported to be in the agreement, including those dealing with “renewable” energy credits. The projected additional revenue from the tax increases is to fund certain “green energy” initiative. The actual text of the legislation is presently slated for the Senate parliamentarian to review on August 3. Full Senate consideration would occur after that date.
Note: There presently is no word on how Senator Sinema views the proposal, although she has stated in the past that she will not support legislation that increases corporate or personal tax rates. While the proposals don’t increase actual rates, they do increase effective rates on certain corporations and individuals.
Also, Senate Finance Committee Chairman Charles Grassley has introduced legislation that would index certain tax benefits to adjust for inflation. The indexed provisions include certain tax credits and deductions such as the Child Tax Credit and the Non-Child Dependent Credit. The bill, known as the “Family and Community Inflation Relief Act,” would also adjust for inflation the American Opportunity Tax Credit, Lifetime Learning Credit, and the Student Loan Interest Deduction. The proposal would also extent the current $10,000 limitation on state and local taxes through 2026.
Recent Ag-Related Court Opinions
Child Support Obligation Computed Based on All Income and Loss from Farming.
Gerving v. Gerving, 969 N.W.2d 184 (N.D. 2022)
The issue in this case was the proper way to calculate a father’s child support obligation. The father conducted a farming operation, and a primary issue was whether only income and gains from farming should count for purposes of child support, or whether losses should also be accounted for. Under child support guidelines, the court must determine the payor’s net income and use that amount to calculate the child support obligation. The trial court calculated the father’s income based only on gains and did not include any related losses incurred from equipment trades and other farm-related transactions. The appellate court held that the trial court erred by not including the farm losses to calculate the father’s self-employment income because those losses must be considered to show actual profit from the farming operation. The appellate court also determined that the father had no income from subleases of farmland.
Deduction for Full Amount of C Corporate Shareholder Compensation Not Deductible
Clary Hood, Inc. v. Comr., T.C. Memo. 2022-15
A big audit issue for farming (and other) corporations is reasonable compensation. This case illustrates that point in a non-farm context. Here, a married couple were the sole shareholders of the petitioner, a corporation engaged in the construction business that graded and prepared land. The petitioner’s growth was irregular from 2000 on. The principal took a relatively modest salary between 2000 and 2012 but took a big increase in the years 2013 to 2016, ostensibly to compensate for earlier years. The company had an outside consulting firm perform an analysis to determine what the principal's compensation should be. The IRS challenged the amount in 2015 and 2016.
The Tax Court examined the usual factors considered in such a case including the employee's qualifications; the nature, extent, and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with gross income and net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; and the salary policy of the taxpayer as to all employees. The Tax Court denied a deduction for the full amount of the compensation. In addition, the IRS assessed an accuracy-related penalty for both years. The taxpayer was able to show that he relied in good faith on the advice of the accounting firm and the Tax Court did not sustain the penalty. However, for the second year the taxpayer could not substantiate its reliance on the outside adviser.
Homeowner’s Policy Doesn’t Cover Farming Injury
Mills v. CSAA General Insurance. Co., No. 21-CV-0479-CVE-JFJ, 2022 U.S. Dist. LEXIS 114741 (N.D. Okla. Jun. 29, 2022)
It’s always good to make sure you understand the extent of coverage you have under an insurance policy, and what is excluded from coverage. This case illustrates that point. Here, the plaintiff became pinned between a trailer and barn while loading cattle, and was hospitalized for several days as a result of his resulting injuries. The plaintiff had a homeowner’s insurance policy with the defendant and filed a claim for coverage under the policy for his injuries. The defendant denied coverage on the basis that the policy only covered claims for bodily or personal injury brought by third parties against the plaintiff, and that the farming endorsement did not extend coverage for the plaintiff’s own bodily injury and incorporated the policy’s exclusion for bodily injury into the farming endorsement.
The plaintiff sued, claiming that he intended to purchase coverage for personal injuries he might suffer while operating his farm and that he had a reasonable expectation of coverage under the policy. He also claimed that the exclusions were “buried in the more than 100 pages of the policy.” The trial court disagreed, determining that the policy’s liability provisions applied only to claims for bodily or personal injury brought by third parties against the plaintiff. The trial court also determined that the policy language was not ambiguous and was not “buried deep” into the policy documents.
Gross Acres, not Tillable Acres, Used for Partition-in-Kind
Mueggenberg v. Mueggenberg, No. 21-0887, 2022 Iowa App. LEXIS 510 (Iowa Ct. App. Jun. 29, 2022)
The two parties were comprised of five siblings, who each had an undivided one-fifth interest in 179.61 acres of farmland. The plaintiffs, three of the siblings, filed for a partition in kind. The court appointed an appraiser to analyze and equally divide the farmland between the three parties. The appraiser determined that partitioning the land into five equal sections would be unworkable because the land’s topography varied greatly. The appraiser recommended the defendants should receive an approximate share of 40 percent comprised of 62 gross acres and all the future easement payments from the energy company that operated a windmill on the land. The appraiser allocated 117.61 gross acres to the plaintiffs. The defendants claimed that they were entitled to 68.64 tillable acres. The appraiser explained that while the acre division was not necessarily 40/60, the land awarded to the defendants was overall more desirable and expensive as it had a higher CSR2 rating.
The trial court agreed with the appraiser and assessed fees and costs to the defendants. On appeal, the appellate court found the defendants’ calculations for a different split were inaccurate as the defendants used tillable acres when they should have used gross acres in the calculation. The defendants also failed to account for the difficulty of dividing the land caused by a non-uniform property line and the existence of terraces. The appellate court affirmed the trial court’s decision to adopt the appraiser’s division but reversed the trial court’s award of attorney’s fees and costs. Accordingly, the appellate court vacated the trial court’s assessment of costs and remanded the case with instructions that only costs arising from the contested matter be assessed to the defendants. The parties were to share all remaining costs proportionately.
Conclusion
Keep your eyes on what, if any, tax proposals come out of the Senate. Increasing taxes on individuals whether via the NIIT or the corporate tax in a recessionary economy (despite the changed definition from the White House) is not a good idea. It’s particularly a bad idea when any additional revenue is to be used to fund inefficient and costly energy proposals to further energy policies that are the driver to the current inflationary problems in the economy.
On the ag law front, make sure to understand how child support is computed in the context of a farmer’s divorce; pay reasonable compensation to shareholder/offices for services rendered; know what is and what is not covered under an insurance policy; and avoid partition actions – they rarely end up in family harmony.
July 28, 2022 in Civil Liabilities, Income Tax, Insurance, Real Property | Permalink | Comments (0)
Thursday, June 16, 2022
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Overview
Agricultural law touches many aspects of the daily life of a farmer, rancher, or anyone using an ag-related product or service. In today’s post, I provide a small sample illustrating that very point.
Some additional ag law-related developments – it’s the topic of today’s post.
Claims Against Dog Food Producer Wrongfully Dismissed
Kucharski-Berger v. Hill's Pet Nutrition, Inc., 60 Kan. App. 2d 510, 494 P.3d 283 (Kan, Ct. App. 2021)
A veterinarian prescribed Hill’s Pet Nutrition dog food for the plaintiff’s dog. The plaintiff sued Hill’s Pet Nutrition upon discovering that the dog food did not contain medicine or drugs, had not been tested and approved for medicinal purposes by the FDA, but was priced higher than “normal” dog food. The plaintiff claimed the defendant and other pet food manufacturers had conspired to monopolize the prescription pet food market and they had artificially inflated the prices by claiming the food required a prescription. No federal or state law required pet food to be sold with a prescription from a vet. The plaintiff claimed the defendant had violated the Kansas Restraint of Trade Act (KRTA) and the Kansas Consumers Protection Act (KCPA) and also brought an unjust enrichment claim. The trial court dismissed the case for failure to state a claim under KCPA, the plaintiff had to allege that the defendant was engaged in a deceptive act or practice involving the plaintiff that caused the plaintiff damages. The plaintiff claimed that the defendant had misrepresented that the dog food required a prescription so as to sell at a premium price. The appellate court determined that the plaintiff had clearly alleged sufficient facts to put the defendant on notice of the allegations under the KCPA. The defendant claimed that the plaintiff failed to show a causal connection between the prescription practices and the injury, but the appellate court noted that the plaintiff did not need to show she was misled, only that the defendant’s actions were deceptive. On that point, the appellate court noted that the plaintiff had provided enough detail in the complaint to show that the prescription requirement could be deceptive and was the cause of her spending more money (the injury). As such, the plaintiff’s KCPA claims should not have been dismissed. With respect to the KRTA claim, the court noted that the plaintiff was required to allege that the defendant was creating a restriction in trade, increasing or reducing the price of merchandise to prevent competition, and had entered into an agreement establishing a set price for a good in the market. The plaintiff alleged the defendant had entered into a contract with other dog food producers to set prices higher for prescription dog food, which violated KRTA. The plaintiff also claimed that the defendant had entered into a conspiracy to monopolize the prescription dog food market. As such, the appellate court held that the plaintiff had properly presented the KRTA claims. The appellate court reversed the trial court’s dismissal and remanded the case for furthering proceedings.
Oil and Gas Developments
Fracking Water Not Taxable
CDOR PLR 22-001 (Apr. 8, 2022)
A Colorado company sold non-potable river water to oil and gas producers for use in hydraulic fracturing and sought guidance from the Colorado Department of Revenue (CDOR) as to its taxability. The company delivers water by withdrawing it from ditch and reservoir systems, securing rights-of-way, and laying temporary surface lines to the customers’ locations. The CDOR concluded that the company did not owe sales tax because water in conduits, pipes, ditches and reservoirs is not subject to sales tax.
Colorado Changes Oil and Gas Severance Tax Credit
H.B. 1391, signed into law on June 7, 2022.
Colorado H.B. 1391 was signed into law on June 7, 2022 and changes the calculation of the oil and gas severance tax credit. Beginning January 1, 2025, the credit will be calculated as 76.56 percent of the gross income attributable to the well in the current tax year, multiplied by the local mill rate of the prior year. Under prior law, the credit was 87.5 percent of the prior year’s local taxes, which are assessed at 87.5 percent of the gross income of the prior year and are subject to the prior year’s local mill levies. The change is intended to simplify the credit’s calculation and eliminate the one-year lag in its administration. Well operators, rather than royalty interest owners will be responsible for the tax.
Low-Producing Oil and Gas Tax Exemption Tied to Actual Projection.
Farmer v. Board of Ellis County Commissioners, Nos. 123,488 & 123,489, 2022 Kan. App. LEXIS 19 (Kan. Ct. App. May 6, 2022)
The taxpayer sought a refund for property tax exemptions under state law (K.S.A. 79-201t) for tax year 2018 for several oil and gas leases on his property for low-producing oil and gas wells (less than five barrels per day. The Board of Tax Appeals (BOTA) denied the refund on the basis that it would be retrospective and concluded that the taxpayer should pay the amount of tax based on the predicted production for 2018 rather than actual production. At the trial court, BOTA argued the leases should not be exempt because the 2017 production that was used to find the fair market value for taxes for 2018 was not at the exempt level. BOTA claimed the first time the taxpayers would qualify for the exemption would be in 2019 as the 2018 oil production would be used at that time to predict the value that would meet the exemption level. The trial court held the taxpayers should be granted the exemption as the daily average in 2018 fell below the level required for the exemption. On appeal, the appellate court concluded that the statute was unclear on when the exemption could take effect and if a refund could be awarded. The appellate court looked at how BOTA honored tax refunds in the past for taxpayers who filed for an exemption retrospectively. Based on legislative intent, the appellate court held the intent was clearly to allow tax exemptions on the first day an oil well would qualify. The appellate court held that the taxpayer should be refunded property tax if the well actually produced at exempt levels instead of the projected production levels.
Conclusion
There’s never a dull moment in the ag law and tax world.
June 16, 2022 in Civil Liabilities, Real Property, Regulatory Law | Permalink | Comments (0)
Sunday, June 12, 2022
More Ag Law Court Developments
Overview
Three recent court opinions from Kansas illustrate the diverse ways that the law is involved in ag-related activities. Two of the cases involve ag real estate, with one of those having estate planning implications. The other case involves rules involving showing animals at the State Fair.
More ag-related court cases and their implications – it’s the topic of today’s post.
Irrigation System Value Included in Land Valuation in Partition Action
Claeys v. Claeys, No. 124,032, 2022 Kan. App. LEXIS 16 (Kan. Ct. App. May 6, 2022)
Two brothers each inherited an undivided one-third interest in farmland, and the wife of a deceased brother owned the other one-third interest via a trust created for her benefit. The brothers obtained a water permit, installed and $83,000 ten-tower irrigation system to convert the dryland to irrigation crop farming, and spent over $10,000 on piping and a water meter. The irrigation system was one brother’s personal property. The sister in-law did not contribute to the cost of these improvements. She filed a partition action seeking to sever the co-ownership. The brothers counterclaimed, asserting they improved the value of the land and that her share should be offset to account for the improvements. Three commissioners were appointed to appraise the land and valued the dryland at $390,000 and the irrigated land at $2,065,000, not including the irrigation equipment. The sister-in-law chose to buy the smaller, non-irrigated tract. The commissioners determined that because her tract was less valuable, the brothers owed her $428,333 to account for her one-third interest, with $50,000 of that amount placed in escrow pending the outcome of the brothers’ counterclaim. The trial court determined that the definition of “improvements” should be limited to physical structures and equipment. The trial court ruled for the sister-in-law on the brothers’ counterclaim, find that the brothers had not shown that they receive a credit for the irrigation-driven value increase. According to the trial court, the irrigation equipment was personal property of one of the brothers and was not an “improvement.” Hence, the trial court awarded the $50,000 to the sister-in-law. On appeal, the appellate court held the trial court erred when it found the brothers did not improve the land. The appellate court determined that Kansas law requires a “broader inquiry” into possible improvements to the land other than just physical structures and equipment, and that the trial court erred when it found that the brothers did not improve the land when they installed the irrigation system. Changing the land’s status from dry to irrigated and obtaining a water right improved the value of the land. “Improvements,” the appellate court determined, are not simply limited to physical additions. The personal property (irrigation system) improved the property and should have been included in the land valuation. The water permit was not the sole source of the higher land value for the irrigated ground – the irrigation system was necessary to make the water permit “operative.” Accordingly, the appellate court held that the trial court erred in denying the brothers’ counterclaim and remanded the case to the trial court to determine whether to award credit for the value of the irrigation equipment based on an assessment of the evidence previously presented at trial.
Comment: The case points out the possible peril of leaving property to the children in co-equal undivided interests. What often happens is that a child (or multiple children) will want to "cash-out" by filing a partition action. That happened in this case, and then the issue of valuation came up to balance out the economics of the partition. In determining value, "improvements" had to be dealt with. A change from dryland to irrigation farming increases the value of the land and must be accounted for in a partition action.
Grand Champion Lamb Properly Stripped of State Fair Title
Gilliam v. Kansas State Fair Board, No. 122, 254, 2022 Kan. App. LEXIS 18 (Kan. Ct. App. May 6, 2022)
The plaintiff’s lamb was crowned grand champion of the market-lamb competition at the 2016 Kansas State Fair. State Fair rules bar exhibitors from treating any part of an animal’s body, internally or externally, with a substance to alter conformation. Regulations also prohibit changing an animal's natural contours or appearance of an animal’s body or inserting a foreign material under the skin – known as "unethical fitting." Before the Fair was over, the lamb was removed from display, slaughtered and its meat was sold to market. After the lamb was processed, a veterinarian analyzed the lamb’s carcass and observed multiple injection marks on the back of both hind legs with associated swelling and discoloration in the muscle and fat and abnormal reddening of the skin over those areas. The veterinarian concluded that multiple recent injections had likely caused the abnormalities. Lab tests did not identify any drugs in the lamb’s system leading the veterinarian to conclude that a natural substance had been injected. These finding led the veterinarian to conclude that injections were used to alter the lamb’s appearance, rather than treat the lamb for any illness. Consequently, the defendant (State Fair Board) determined that the plaintiff had engaged in an “unethical fitting,” and stripped the plaintiff of her title along with her championship belt buckle and her $4,000 cash prize. The plaintiff appealed to two State Fair committees with no success and then filed suit. The trial court determined that the veterinarian’s findings did not provide “substantial evidence” as to unethical fitting. While the veterinarian confirmed his findings of injections, the trial court noted that he did not find that the lamb’s appearance had been altered and never used the term “unethical fitting.” Thus, the trial court held that the plaintiff had sustained her burden of proving the invalidity of the defendant’s action. On appeal, the defendant asserted that “unethical fitting” was its determination to make, not that of a veterinarian, and that the trial court erred in basing its determination on the veterinarian’s conclusion which it found unsupported by the evidence. The appellate court noted that state law vested in the defendant the authority to adopt rules and regulations governing the State Fair. Those rules provided non-exhaustive examples of what could be considered unethical fitting and the appellate court determined that the defendant could consider injections to be an “unethical fitting” even though not listed in the examples. Thus, the appellate court reversed the trial court and held that substantial evidence supported the defendant’s decision to disqualify the plaintiff’s lamb in accordance with the defendant’s rules and that a finding of “unethical fitting” need not be made nor attested to by a veterinarian.
Comment: The facts of the case seem to indicate that the practice of “airing” was engaged in with respect to the lamb. Airing occurs most frequently with market animals such as steers and lambs and is a practice that injects air into the animal’s muscle. The fat content of the animal’s feed is increased with the intent of the fat filling the “aired” area. When the practice occurs, it is possible that the animal owner does not know that it has happened. Many animals are sent to professional “fitters” and the owner merely shows the animal.
Landowner Establishes Adverse Possession Through “Tacking.”
Shelton v. Chacko, 501 P.3d 909 (Kan. Ct. App. 2022)
The parties owned adjacent tracts. A fence existed between the properties on the assumed boundary. The plaintiff had a survey completed which indicated that the fence was on the plaintiff’s land inside the surveyed boundary. The plaintiff sued to have the surveyed line established as the boundary, and the defendant counterclaimed to establish the fence line as the boundary via adverse possession. The trial court held the appellee had established adverse possession over the property through “tacking.” While the defendant had only possessed the strip in controversy for eight years, the defendant claimed that the evidence showed that the prior owner of the defendant’s tract had owned it and used it up to the fence for at least seven years which meant that the 15-year requirement for adverse possession was satisfied under Kansas law. The trial court ruled that the defendant had satisfied the requirements for adverse possession via tacking because there was no interruption in possession and no abandonment for at least 15 years, and the defendant had a continual good-faith belief of ownership. On appeal, the appellate court affirmed, noting that the defendant provided credible testimony of his belief of ownership up to the fence. The appellate court noted that the fence was in place when the defendant bought his tract and was not repositioned when it was rebuilt.
Note: I often get the question of whether the 15-year requirement (Kansas) for adverse possession “resets” when there is a change in ownership. The answer is “not necessarily so.” Here the defendant had a good faith belief of ownership for seven years and his predecessor in interest had also treated it as the boundary, as did the adjacent owner.
June 12, 2022 in Estate Planning, Real Property, Regulatory Law | Permalink | Comments (0)
