Thursday, January 10, 2019

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 3, 2 and 1

Overview

Since the blog post on December 31, I have been surveying the biggest developments in agricultural law and taxation of 2018.  The first post looked at those developments that were not quite big enough to make the Top 10.  Subsequent posts have examined developments 10 through 4.  That brings us to today – the biggest three developments of 2018 in agricultural law and taxation. 

Number 3 – The 2018 Farm Bill

In general.  In late 2018, a new Farm Bill passed the Congress and was signed into law.  As for cost, the total estimated price tag for the Farm Bill is $867 billion (a large portion of that total is devoted to Food Stamps) and it didn’t address the estimated $32 billion in in cost overruns on price loss coverage (PLC) and agriculture risk coverage (ARC) of the prior Farm Bill.

The Farm Bill, like prior law, doesn’t treat all entities that are similarly taxed the same under the attribution rules.  In other words, an entity must either be a general partnership or a joint venture to not be limited in payment limits at the entity level.   Also remaining the same is the $900,000 AGI limitation to be eligible to participate in federal farm programs.  The general $125,000 payment limit also remains the same.     

Crop reference prices.  Reference prices (for PLC) will be the greater of the current reference price; or 85 percent of the average of the marketing year average price for the most recent five-year period, excluding the high and low prices.  If base acres were not planted to a covered crop from 2009-2017, the base acres will be maintained but won’t be eligible for any PLC or ARC payments.  The old reference price will be used or the “effective reference price” (ERP).  The ERP is used each year and used in determining if there will be a PLC payment.  The ERP will never be lower than the current reference price and can never be higher than 115% of the current reference price (from the 2014 Farm Bill).  That means that it is possible for the reference price to increase when prices decrease.   The ERP will be calculated annually based on 85 percent of the Olympic Average of the mid-year average prices for the last five crop years (eliminating the highest and lowest prices).  If this number is higher, it is then compared to 115 percent of the current reference price.  If it is lower, it will be the effective reference price for that crop year.  If it is higher than the 115 percent, it will be limited to 115 percent.  Presently, most major crops are not close to any adjustment to the reference price for at least the next couple of years. 

The Farm Bill give participating producers a one-time opportunity to update program yields.  The update is accomplished by means of a formula.  The formula takes 90 percent of the average yield for crops from 2013-2017 and reduces it by a ratio that compares the 2013-2017 national average yields with the average for 2008-2012 crops.  That producers a “yield update factor” that determines the portion of the initial 90 percent that can be used to update program yields.  The update factor will vary from crop to crop.   

As for ARC, it will be based on physical location of the farm and RMA data will have priority.  If a farm crosses county lines, ARC payments will be computed on a pro-rata basis in accordance with the acres in each county with irrigated and non-irrigated payments being calculated for each county.  Also, the USDA, with respect to ARC, will use a yield plug of 80 percent of the “transitional yield” and will calculate a trend-adjusted yield that will be used in benchmark calculations.

Other features.  The Farm Bill contains numerous other provision of importance.  The following is a bullet-point list of a few of the more significant ones:

  • While a producer is locked into either PLC or ARC for 2019-2020, an annual election can be made to change the election beginning in 2021.
  • The dairy margin program has been enhanced significantly such that smaller scale dairy producers are major beneficiaries under the Farm Bill.
  • The CRP acreage cap is increased from 24 million acres to 27 million acres by 2023 (with CRP rental rates limited to 90 percent of the county average rental rate for land enrolled via the continuous enrollment option, and 85 percent of the county average for general enrollments). Two million acres are reserved for grasslands.
  • The Conservation Stewardship Program (CSP) is reauthorized, but eliminated is the acre-based funding cap and the $18/acre national average payment rate. Spending is also capped at $1 billion annually. 
  • The Environmental Quality Incentives Program (EQIP) gets enhanced funding (by $.25 billion) with half of the increase pegged for livestock.
  • Farm direct ownership loans are increased from $300,000 to $600,000, and guarantees are enhanced from $700,000 to $1,750,000.
  • The Farm Bill increases loan rates by 13-24 percent for grains and soybeans. The new loan rates are$2.20 for corn; $6.20 for soybeans; $3.38 for wheat; $2.20 for sorghum; $2.50 for barley; $2.00 for oats.
  • Base acres that were planted entirely to grass and pasture from 2009-2017 will not be eligible for farm program payments, but will be eligible for a five-year grassland incentive contract with the “rental amount” set at $18/acre.
  • Crop insurance is not significantly changed, but modifications to crop insurance are designed to incentivize the use of cover crops.
  • Hemp is added as an “agricultural commodity” eligible for taxpayer subsidies and it is removed from the federal list of controlled substances.
  • Nieces nephews and first cousins can qualify for payments without farming;
  • Work is not required to get food stamps;
  • New taxpayer subsidies are proved for hops and barley.
  • The Farm Bill codifies many changes to the National Organic Standards Board and how the Board represents the public and the USDA on matters concerning organic crops.

Number Two - Waters of the United States (“WOTUS”) Developments

In general.  The Clean Water Act (CWA) makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without first obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE).  Unfortunately, just exactly what is a WOTUS that is subject to federal regulation has been less than clear for many years and that uncertainty has resulted in a great deal of litigation.  In 2006, the U.S. Supreme Court had a chance to clarify the matter but failed.  Rapanos v. United States, 547 U.S. 715 (2006).  In subsequent years, the Environmental Protection Agency (EPA) attempted to exploit that lack of clarity by expanding the regulatory definition of a WOTUS. 

2014 proposed regulation.  In March of 2014, the EPA and the COE released a proposed rule defining “waters of the United States” (WOTUS) in a manner that would significantly expand the agencies’ regulatory jurisdiction under the CWA. Under the proposed rule, the CWA would apply to all waters which have been or ever could be used in interstate commerce as well as all interstate waters and wetlands. In addition, the proposed WOTUS rule specifies that the agencies’ jurisdiction would apply to all “tributaries” of interstate waters and all waters and wetlands “adjacent” to such interstate waters. The agencies also asserted in the proposed rule that their jurisdiction applies to all waters or wetlands with a “significant nexus” to interstate waters.

Under the proposed rule, “tributaries” is broadly defined to include natural or man-made waters, wetlands, lakes, ponds, canals, streams and ditches if they contribute flow directly or indirectly to interstate waters irrespective of whether these waterways continuously exist or have any nexus to traditional “waters of the United States.” The proposed rule defines “adjacent” expansively to include “bordering, contiguous or neighboring waters.” Thus, all waters and wetlands within the same riparian area of flood plain of interstate waters would be “adjacent” waters subject to CWA regulation. “Similarly situated” waters are evaluated as a “single landscape unit” allowing the agencies to regulate an entire watershed if one body of water within it has a “significant nexus” to interstate waters.

The proposed rule became effective as a final rule on August 28, 2015 in 37 states and became known as the “2015 WOTUS rule.”

2015 court injunction and 2016 Sixth Circuit ruling.  On October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide injunction barring the rule from being enforced anywhere in the U.S. Ohio, et al. v. United States Army Corps of Engineers, et al., 803 F.3d 804 (6th Cir. 2015). Over 20 lawsuits had been filed at the federal district court level. On February 22, 2016, the U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear the challenges to the final rule, siding with the EPA and the U.S. Army Corps of Engineers that the CWA gives the circuit courts exclusive jurisdiction on the matter. The court determined that the final rule is a limitation on the manner in which the EPA regulates pollutant discharges under CWA Sec. 509(b)(1)(E), the provision addressing the issuance of denial of CWA permits (codified at 33 U.S.C. §1369(b)(1)(E)). That statute, the court reasoned, has been expansively interpreted by numerous courts and the practical application of the final rule, the court noted, is that it impacts permitting requirements. As such, the court had jurisdiction to hear the dispute. The court also cited the Sixth Circuit’s own precedent on the matter in National Cotton Council of America v. United States Environmental Protection Agency, 553 F.3d 927 (6th Cir. 2009) for supporting its holding that it had jurisdiction to decide the dispute. Murray Energy Corp. v. United States, Department of Defense, No. 15-3751, 2016 U.S. App. LEXIS 3031 (6th Cir Feb. 22, 2016). 

2017 – The U.S. Supreme Court jumps in and the “suspension rule.”  In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision. National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017). About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006). The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication in the Federal Register. In November of 2017, the EPA issued a proposed rule (the “suspension rule”) delaying the effective date of the WOTUS rule until 2020.

2018 developments.  In January of 2018, the U.S. Supreme Court ruled unanimously that jurisdiction over challenges to the WOTUS rule was in the federal district courts, reversing the Sixth Circuit’s opinion. National Association of Manufacturer’s v. Department of Defense, No. 16-299, 2018 U.S. LEXIS 761 (U.S. Sup. Ct. Jan. 22, 2018). The Court determined that the plain language of the Clean Water Act (CWA) gives authority over CWA challenges to the federal district courts, with seven exceptions none of which applied to the WOTUS rule. In particular, the WOTUS rule neither established an “effluent limitation” nor resulted in the issuance of a permit denial. While the Court noted that it would be more efficient to have the appellate courts hear challenges to the rule, the court held that the statute would have to be rewritten to achieve that result. Consequently, the Supreme Court remanded the case to the Sixth Circuit, with instructions to dismiss all of the WOTUS petitioners currently before the court. Once the case was dismissed, the nationwide stay of the WOTUS rule that the court entered in 2015 was removed, and the injunction against the implementation of the WOTUS rule entered by the North Dakota court was reinstated in those 13 states.

This “suspension” rule that was issued in November of 2017 was published in the Federal Register on February 6, 2018, and had the effect of delaying the 2015 WOTUS rule for two years. In the interim period, the controlling interpretation of WOTUS was to be the 1980s regulation that had been in place before the 2015 WOTUS rule became effective.  The “suspension rule” was challenged in court by a consortium of environmental and conservation activist groups.  They claimed that the rule violated the Administrative Procedures Act (APA) due to inadequate public notice and comment, and that the substantive implications of the suspension were not considered which was arbitrary and capricious, and improperly restored the 1980s regulation.

In June of 2018, the federal district court for the southern district of Georgia entered a preliminary injunction barring the WOTUS rule from being implemented in 11 states - Alabama, Florida, Georgia, Indiana, Kansas, Kentucky, North Carolina, South Carolina, Utah, West Virginia and Wisconsin. Georgia v. Pruitt, No. 2:15-cv-79, 2018 U.S. Dist. LEXIS 97223 (S.D. Ga. Jun. 8, 2018).  A prior decision by the North Dakota federal district court had blocked the rule from taking effect in 13 states – AK, AZ, AR, CO, ID, MO, MT, NE, NV, NM, ND, SD and WY. North Dakota v. United States Environmental Protection Agency, No. 3:15-cv-59 (D. N.D. May 24, 2016).

In July of 2018, the COE and the EPA issued a supplemental notice of proposed rulemaking. The proposed rule seeks to “clarify, supplement and seek additional comment on” the 2017 congressional attempt to repeal the Obama Administration’s 2015 WOTUS rule.  Repeal would mean that the prior regulations defining a WOTUS would become the law again. The agencies are seeking additional comments on the proposed rulemaking via the supplemental notice. The comment period was open through August 13, 2018.

In August of 2018, the court issued its opinion in the “suspension rule” case. The court agreed with the plaintiffs, determining that the content restriction on the scope of the public comments that the agencies levied during the rulemaking process violated the APA, and enjoined the suspension rule on a nationwide basis. South Carolina Conservation League, et al. v. Pruitt, No. 2-18-cv-330-DCN, 2018 U.S. Dist. LEXIS 138595 (D. S.C. Aug. 16, 2018).

In September of 2018, another federal court entered a preliminary injunction against the implementation of the Obama-era WOTUS rule.  This time the injunction applied in Texas, Louisiana and Mississippi, and applied until the court resolved the case on the issue pending before it. The court specifically noted that the public’s interest in having the Obama-era WOTUS rule preliminarily enjoined was “overwhelming.” Texas v. United States Environmental Protection Agency, et al., No. 3:15-CV-00162 (S.D. Tex. Sept. 12, 2018).

On December 11, 2018, the EPA and the COE proposed a new WOTUS definition that is narrower than the 2015 WOTUS definition, particularly with respect to streams that have water in them only for short periods of time.  Once the new proposed rule is published in the Federal Register, a 60-day comment period will be triggered.  That publication date (and comment period and subsequent hearing) has now been delayed by the partial government shutdown.

Whew!  What a trek through the WOTUS landscape!

Number 1 - I.R.C. §199A (and the proposed regulations)

In general. At the top of the list for 2018 stands the qualified business income deduction (QBID) of new I.R.C. §199A as created by the Tax Cuts and Jobs Act (TCJA).  The QBID is a 20 percent deduction for sole proprietorships and pass-through businesses on qualified business income effective for years 2018-2025.  The new deduction makes tax planning and preparation more complex - much more complex and it impacts all farm and ranch businesses in terms of how to structure the business and tax planning to take advantage of the deduction. In addition, a complex formula applies to taxpayers that are deemed “high income” under the provision.  The formula causes a re-computation of the deduction and injects additional planning concerns.  In addition, a separate computation applies to agricultural cooperatives and their patrons.  The wide application of the new provision throughout the economy and the agricultural sector cannot be understated.

Proposed regulations.  On August 8, 2018, the Treasury issued proposed regulations concerning the QBID.  While some aspects of the proposed regulations are favorable to agriculture, other aspects create additional confusion, and some issues are not addressed at all. One favorable aspect is an aggregation provision that allows a farming operation with multiple businesses (e.g., row-crop; livestock; etc.) and common ownership to aggregate the businesses for purposes of the QBID.  This is, perhaps, the most important feature of the proposed regulations with respect to agricultural businesses because it allows a higher income farming or ranching business to make an election to aggregate their common controlled entities into a single entity for purposes of the QBID. 

Similar to the benefit of aggregation, farms with multiple entities can allocate qualified W-2 wages to the appropriate entity that employs the employee under common law principles.  This avoids the taxpayer being required to start payroll in each entity.  Likewise, carryover losses that were incurred before 2018 and that are now allowed in years 2018-2025 will be ignored in calculating qualified business income (QBI) for purposes of the QBID.  This is an important issue for taxpayers that have had passive losses that have been suspended under the passive loss rules. 

Other areas of the proposed regulations need clarification in final regulations.  As for aggregation and common ownership of the entities to be aggregated, the proposed regulations limit family attribution to just the spouse, children, grandchildren and parents.  In other words, common ownership is limited to lineal ancestors and descendants.  It would be helpful if the final regulations included siblings in the relationship test.  Also, one of the big issues for farmers and ranchers operating as sole proprietorships or as a pass-through entity is whether land rental income constitutes QBI.  One of the unclear issues under the proposed regulations is whether income that a landlord receives from leasing land to an unrelated party (or parties) under a cash lease or non-material participation share lease may qualifies for the QBID.  It may not.  Clarity is needed.    

The proposed regulations appear to take the position that gain that is “treated” as capital gain is not QBI. This would appear to exclude I.R.C. §1231 gain (such as is incurred on the sale of breeding livestock) from being QBI-eligible.  Clarity is needed on this point also.  Other areas needing clarification include the treatment of losses and how to treat income from the trading in commodities.  In addition, clarification is needed with respect to various issues associated with a trusts and estates. 

Conclusion

2018 was another incredibly active year on the ag law and tax front.  2019 looks like it will continue the pace.  Stay dialed in to the blog, website, seminars, TV and radio programs to keep up with the developments as they occur.

January 10, 2019 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, January 8, 2019

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 6, 5 and 4

Overview

This week I continue the trek through the Top Ten ag law and tax developments of 2018 with the top six developments.  Today’s post goes through numbers six, five and four.  On Thursday I will turn attention to the remaining top three developments

Number 6 – U.S. Supreme Court Says States Can Collect Sales Tax on Remote Sellers

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)

In 2018, the U.S. Supreme Court handed South Dakota a narrow 5-4 win in its quest to collect taxes from online sales.  The Court held that the Constitution’s Commerce Clause did not bar South Dakota from statutorily requiring remote sellers without a physical presence in the state to collect and remit sales tax on goods and services that are sold to buyers for delivery inside the state of South Dakota.  In so doing, the Court overruled 50 years of Court precedent on the issue. 

Historical precedence.  In 1967, the U.S. Supreme Court determined that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States” in holding that Illinois could not subject a mail order seller located in Missouri to use tax where the seller had no physical presence in Illinois.  National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967).  In holding the law unconstitutional, the Court reasoned that subjecting the seller’s interstate business to local “variations in rates of tax…and record-keeping requirements” would violate the purpose of the Commerce Clause “to ensure a national economy free from…unjustifiable local entanglements.” 

Twenty-five years later, the Court reaffirmed the limitations of the Commerce Clause on state regulatory authority in Quill Corporation v. North Dakota, 504, U.S. 298 (1992).  In Quill, the Court held that a mail order house with no physical presence in North Dakota was not subject to North Dakota use tax for “property purchased for storage, use, or consumption within the State.”  The Court followed closely its holding in National Bellas Hess, Inc. because doing so “encourage[d] settled expectations and …foster[ed] investment by businesses and individuals.”  As applied to internet sales, Quill (which predated the internet) does not exempt all internet sales from state sales taxes – just sales by sellers who don’t have a physical presence in a particular state.  National retailers have a presence in many states.

More recently, the Court examined a Colorado “tattletale” law that required out-of-state sellers with no physical presence in the state “to notify…customers of their use tax liability and to report” sales information back to Colorado.  Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2013).  The trial court enjoined enforcement of the law on Commerce Clause grounds.  On appeal, the Tenth Circuit held that it couldn’t hear the challenge to the law because the Tax Injunction Act (28 U.S.C. §1341) divested it of jurisdiction and the matter belonged in state court and, ultimately, the U.S. Supreme Court.  The Tenth Circuit remanded the case for dismissal of the Commerce Clause claims and dissolution of the permanent injunction.  The U.S. Supreme Court reversed and remanded the decision of the Tenth Circuit on the jurisdiction issue and, on remand, the Tenth Circuit, invalidated the Colorado law on Commerce Clause grounds.  Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). 

South Dakota Legislation.  S.B. 106 was introduced in the 2016 South Dakota legislative session.  It requires the collection of sales taxes from certain remote sellers – those with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same timeframe.  After S.B. 106 was signed into law, the state Department of Revenue soon thereafter began issuing notices to sellers that it thought were in violation of the law.  Several out-of-state sellers that received notices did not register for sale tax licenses as the law required, and the state took legal action against them.  The result was that the South Dakota Supreme Court invalidated S.B. 106 on Commerce Clause grounds based on the U.S. Supreme Court precedent referenced above.  The U.S. Supreme Court agreed to hear the case.

U.S. Supreme Court decision.  Article I, Section 8 of the U.S. Constitution says that, “The Congress shall have the power...to regulate commerce…among the several states…”.  That was the key point of the Court’s 1967 Bellas Hess, Inc. decision.  As noted above, in that case the Court stated that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States.”  Apparently, that is not the case anymore, at least according to the majority in Wayfair – Justices Kennedy, Thomas, Ginsburg, Alito and Gorsuch.  Under the new interpretation of the Commerce Clause, states can impose sale tax obligations on businesses that have no physical presence in the state.  But is that completely true?  Can the Court’s opinion be construed as giving the states a “blank check” to tax out-of-state businesses?  Maybe not.

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

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

Implications.  Presently, 23 states are “full members” of the Streamlined Sales and Use Tax Agreement.  For those states, the Wayfair majority seemed to believe that had the effect of minimizing the impact on interstate commerce.  Also, it would appear that any state legislation would have to have exceptions for small businesses with low volume transactions and sales revenue.  That’s an important point for many rural businesses that are selling online.  Whether a series LLC (in some states such as Iowa) or subsidiaries of a business could be created, each with sales below the applicable threshold, remains to be seen.

Post Wayfair, where will the line be drawn?  Wayfair involved state sales tax.  Will states attempt to go after a portion of business income of the out-of-state business via income tax?  That seems plausible.  However, the Interstate Income Act of 1959 (15 U.S.C. §381-384), requires that a business (or individual) have some sort of connection with a state before its income can be taxed (at least with respect to the solicitation of orders for tangible personal property).  Is that legislation now unconstitutional too? Or, is there a distinction remaining between taxing receipts as opposed to income?  Only time will tell.

Number 5 - Discharges of “Pollutants” To Groundwater

Hawai’i Wildlife Fund v. Cty. of Maui, 881 F.3d 754 (9th Cir. 2018); Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018); Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), 

Background.  2018 saw a great deal of litigation on the issue of whether the discharge of a “pollutant” into groundwater requires a discharge permit under the Clean Water Act (CWA). Often, the courts have deferred to the EPA position that a point source discharge of a pollutant to groundwater that is hydrologically connected to a “Water of the United States” (WOTUS) is subject to the CWA.  However, some courts take the position that a discharge, to be subject to the CWA, must be directed from a point source to a WOTUS.  It’s a big issue for agriculture, particularly irrigation crop agriculture. 

Ninth Circuit opinion.  Early in the year, the U.S. Court of Appeals for the Ninth Circuit said that at least some discharges into groundwater are a CWA-covered event.  In the case, the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF), which is the principal municipal wastewater treatment plant for a city. Although constructed initially to serve as a backup disposal method for water reclamation, the wells have since become the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean. The LWRF receives approximately 4 million gallons of sewage per day from a collection system serving approximately 40,000 people. That sewage is treated at LWRF and then either sold to customers for irrigation purposes or injected into the wells for disposal. The defendant injects approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells. The defendant conceded, and its expert, confirmed that wastewater injected into wells 1 and 2 enters the Pacific Ocean. In addition, in June 2013 the EPA, the Hawaii Department of Health, the U.S. Army Engineer Research and Development Center, and researchers from the University of Hawaii conducted a study on wells 2, 3 and 4. The study involved placing tracer dye into Wells 2, 3, and 4, and monitoring the submarine seeps off Kahekili Beach to see if and when the dye would appear in the Pacific Ocean. This study, known as the Tracer Dye Study, found that 64% of the treated wastewater from wells 3 and 4 discharged into the ocean.

The plaintiff sued, claiming that the defendant was in violation of the Clean Water Act (CWA) by discharging pollutants into navigable waters of the United States without a CWA National Pollution Discharge Elimination System (NPDES) permit. The trial court agreed, holding that an NPDES permit was required for effluent discharges into navigable waters via groundwater.

On appeal, the appellate court held that the wells were point sources that could be regulated through CWA permits despite the defendant’s claim that an NPDES permit was not required because the wells discharged only indirectly into the Pacific Ocean via groundwater. Specifically, the appellate court held that “a point source discharge to groundwater of “more than [a] de minimis” amount of pollutants that is “fairly traceable from the point source . . . such that the discharge is the functional equivalent of a discharge into a navigable water” is regulated under the CWA.” The appellate court reached this conclusion by citing cases from other jurisdictions that determed that an indirect discharge from a point source into a navigable water requires an NPDES discharge permit. The defendant also claimed its effluent injections are not discharges into navigable waters, but rather were disposals of pollutants into wells, and that the CWA categorically excludes well disposals from the permitting requirements. However, the appellate court held that the CWA does not categorically exempt all well disposals from the NPDES requirements because doing so would undermine the integrity of the CWA’s provisions. Lastly, the plaintiff claimed that it did not have fair notice because the state agency tasked with administering the NPDES permit program maintained that an NPDES permit was unnecessary for the wells. However, the court held that the agency was actually still in the process of determining if an NPDES permit was applicable. Thus, the court found the lack of solidification of the agency’s position on the issue did not affirmatively demonstrate that it believed the permit was unnecessary as the defendant claimed. Furthermore, the court held that a reasonable person would have understood the CWA as prohibiting the discharges, thus the defendant’s due process rights were not violated.

EPA action.  After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, EPA seeks comment on whether EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA. A number of courts have taken the view that Congress intended the CWA to regulate the release of pollutants that reach “waters of the United States” regardless of whether those pollutants were first discharged into groundwater. However, other courts, have taken the view that neither the CWA nor the EPA’s definition of waters of the United States asserts authority over ground waters, based solely on a hydrological connection with surface waters. EPA has not stated that CWA permits are required for pollutant discharges to groundwater in all cases. Rather, EPA’s position has been that pollutants discharged from point sources that reach jurisdictional surface waters via groundwater or other subsurface flow that has a direct hydrologic connection to the jurisdictional water may be subject to CWA permitting requirements. As part of its request, EPA sought comments on whether it should review and potentially revise its previous positions. In particular, the EPA sought comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater. The EPA also seeks comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.

Fourth Circuit opinion.  Later in 2018, the U.S. Court of Appeals for the Fourth Circuit largely followed the Ninth Circuit’s approach in a case involving somewhat similar facts.  The court held that an ongoing addition of pollutants to navigable waters was sufficient for CWA citizen -suit cases.  The plaintiffs, a consortium of environmental and conservation groups, brought a citizen suit under the Clean Water Act (CWA) claiming that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.” The trial court dismissed the plaintiffs’ claim.

On appeal, the appellate court held that the court had subject matter jurisdiction under the CWA’s citizen suit provision because the provision covered the discharge of “pollutants that derive from a ‘point source’ and continue to be ‘added’ to navigable waters.” Thus, even though the pipeline was no longer releasing gasoline, it continues to be passing through the earth via groundwater and continued to be discharged into regulable surface waters. This finding was contrary to the trial court’s determination that the court lacked jurisdiction because the pipeline had been repaired and because the pollutants had first passed through groundwater. As such, the appellate court determined that, in accord with the Second and Ninth Circuits, that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge need not be channeled by a point source until reaching navigable waters that are subject to the CWA. The appellate court did, however, point out that a discharge into groundwater does not always mean that a CWA discharge permit is required. A permit in such situations is only required if there is a direct hydrological connection between groundwater and navigable waters. In the present case, however, the appellate court noted that the pipeline rupture occurred within 1,000 feet of the navigable waters. The court noted that the defendant had not established any independent or contributing cause of pollution. 

Sixth Circuit opinion.  After the Ninth Circuit and Fourth Circuit decisions, the U.S. Court of Appeals for the Sixth Circuit issued another opinion in 2018 on the groundwater/CWA issue.  The Sixth Circuit, in concluded that groundwater is not a point source of pollution under the CWA.  The defendant in the case was a utility that burns coal to produce energy.  It also produced coal ash as a byproduct. The coal ash was discharged into man-made ponds. The plaintiffs, environmental activist groups, claimed that the chemicals from the coal ash in the ponds leaked into surrounding groundwater where it was then carried to a nearby lake that was subject to regulation under the Clean Water Act (CWA). The plaintiffs claimed that the contamination of the lake without a discharge permit violated the CWA and the Resource Conservation and Recovery Act (RCRA).

The trial court had dismissed the RCRA claim, but the appellate court reversed that determination and remanded the case on that issue. On the CWA claim, the trial court ruled as a matter of law that the CWA applies to discharges of pollutants from a point source through hydrologically connected groundwater to navigable waters where the connection is "direct, immediate, and can generally be traced." The trial court held that the defendant’s facility was a point source because it "channel[s] the flow of pollutants . . . by forming a discrete, unlined concentration of coal ash," and that the Complex is also a point source because it is "a series of discernible, confined, and discrete ponds that receive wastewater, treat that wastewater, and ultimately convey it to the Cumberland River." The trial court also determined that the defendant’s facility and the ponds were hydrologically connected to the Cumberland River by groundwater. As for the defendant’s facility, the trial court held that "[f]aced with an impoundment that has leaked in the past and no evidence of any reason that it would have stopped leaking, the Court has no choice but to conclude that the [defendant’s facility] has continued to and will continue to leak coal ash waste into the Cumberland River, through rainwater vertically penetrating the Site, groundwater laterally penetrating the Site, or both." The trial court determined that the physical properties of the terrain made the area “prone to the continued development of ever newer sinkholes or other karst features." Thus, based on the contaminants flowing from the ponds, the court found defendant to be in violation of the CWA. The trial court also determined that the leakage was in violation of the defendant “removed-substances” and “sanitary-sewer” overflow provisions. The trial court ordered the defendant to "fully excavate" the coal ash in the ponds (13.8 million cubic yards in total) and relocate it to a lined facility.

On further review, the appellate court reversed. The appellate court held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court rejected the plaintiffs’ assertion that mere groundwater is equivalent to a discernable point source through which pollutants travel to a CWA-regulated body of water. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined, nor discrete. Rather, the court noted that groundwater is a “diffuse” medium that “travels in all directions, guided only by the general pull of gravity.” In addition, the appellate court noted that the CWA regulates only “the discharge of pollutants ‘to navigable waters from any point source.’” In so holding, the court rejected the holdings of the Ninth Circuit and the Fourth Circuit.   

That different conclusion by the Sixth Circuit could prove to be very important for irrigation crop agriculture.  It may also mean that the U.S. Supreme Court could be asked to clear up the discrepancy. 

Number 4 - Air Emission Reporting for Livestock Operations

Fair Agricultural Reporting Method Act (Farm Act) and Subsequent Litigation

Background.  Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule.

Various environmental groups sued, challenging the exemption on the basis that the EPA acted outside of its delegated authority to create the exemption. On the other hand, agricultural groups claimed that the retained reporting requirement for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but determined that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, 853 F.3d 527 (D.C. Cir. 2017).

The court’s order potentially subjected almost 50,000 farms to the additional reporting requirement. As such, the court delayed enforcement of its ruling by issuing multiple stays, giving the EPA additional time to write a new rule. However, on March 23, 2018, President Trump signed into law the Consolidated Appropriations Act of 2018, H.R. 1625. Division S, Title XI, Section 1102 of that law, entitled the Fair Agricultural Reporting Method Act (FARM Act), modifies 42 U.S.C. §9603 to include the EPA exemption for farms that have animal waste air releases. Specifically, 42 U.S.C. §9603(e) is modified to specify that “air emissions from animal waste (including decomposing animal waste) at a farm” are exempt from the CERCLA Sec. 103 notice and reporting requirements. “Animal waste” is defined to mean “feces, urine, or other excrement, digestive emission, urea, or similar substances emitted by animals (including any form of livestock, poultry, or fish). The term animal waste “includes animal waste that is mixed or commingled with bedding, compost, feed, soil or any other material typically found with such waste.” A “farm” is defined as a site or area (including associated structures) that is used for “the production of a crop; or the raising or selling of animals (including any form of livestock, poultry or fish); and under normal conditions, produces during a farm year any agricultural products with a total value equal to not less than $1,000.”

2018 litigation.  Relatedly, in late 2018, various environmental groups filed suit in the Federal District Court for the District of Columbia to overturn a USDA/FSA regulation that was issued in 2016 that exempts medium-sized (as redefined) CAFOs from environmental review under the National Environmental Policy Act (NEPA) before receiving FSA loans or loan guarantees. The groups claim that proper procedures were not followed when the rule was developed, and seek to have the rule rescinded and reissued after a determination of the potential impacts of the exemption is made with the reissued rule made subject to a public comment period.

Before the regulation was issued in 2016, the FSA performed Environmental Impact Statement (EIS) reviews to assess the impact of a government loan or loan guarantee to a medium-sized CAFO – defined as a facility holding 350 dairy cows, 500 feedlot cattle, 1250 hogs, 27,500 turkeys, and 50,000 chickens.  For those facilities meeting the definition of a medium-sized CAFO, the FSA would undertake an EIS before loans or loan guarantees were approved. The results of the EIS were provided to the public before the USDA/FSA dispersed funds.  The EIS process could take many months.  Under the 2016 regulation, an EIS is not required unless a particular farm/facility has more than 699 dairy cows, 999 fat cattle, 2,499 hogs, 54,999 turkeys, and 124,999 chickens. 

Conclusion

Next time I will go through the biggest three developments in ag law and tax.  What do you think they might be?

January 8, 2019 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Wednesday, January 2, 2019

Top 10 Developments in Ag Law and Tax for 2018 – Numbers 10 and 9

Overview

In today’s post I continue the series of the biggest developments in agricultural law and taxation for 2018.  These developments are selected based on their impact to ag producers, agribusinesses and associated professional service businesses on a nationwide basis.  Today I look at what I view as the Tenth and Ninth most important developments of 2018.

Number 10 - Management Activities and the Passive Loss Rules

Robison v. Comr., T.C. Memo. 2018-88

In recent years, the IRS has shown an increased focus on business activities that it believes are being engaged in without an intent to make a profit.  Absent a profit intent, the “hobby loss” rules apply and limit deductions to the amount of income from the activity.  But, engaging in an activity with a profit intent may not be enough to fully deduct losses from the activity.  That’s particularly the case if the taxpayer hires a paid manager to run the operation.  In that situation, the IRS may claim that the taxpayer is not materially participating in the activity under the passive loss rules.  If the IRS prevails on that argument, loss deductions are severely limited, if not eliminated.

Robison v. Comr., T.C. Memo. 2018-88 involved both the hobby loss rules and the passive loss rules.  While the petitioners’ ranching activity was deemed not to be a hobby, the court believed that the taxpayer was not materially participating in the activity.  That triggered the application of the passive loss rules.  

The petitioners deducted their losses from their ranching activity annually starting in 1999 and were audited by the IRS in 2004 and 2008.  Each of those audits concluded with an IRS determination that the petitioners were conducting a trade or business with profit intent (e.g., the activity was not a hobby).  In 2010, the petitioners shifted the ranch business activity from horses to cattle.  The cattle operation was strictly grass-fed, with the cattle grazing upper-elevation Bureau of Land Management (BLM) land during the summer months.  The petitioners negotiated the lease contracts with the BLM.  They also hired a full-time ranch manager to manage the cattle.  However, the petitioners managed the overall business of the ranch.  From 2013-2015, the losses from the ranch declined each year. 

The IRS initiated a third audit and claimed that the ranching activity was a “hobby,” and also raised the alternative argument that the petitioners failed to satisfy the material participation test of the passive loss rules.  The Tax Court determined that the ranching activity was not a hobby based on the nine factors set forth in Treas. Reg. §1.183-2.  However, the court determined that the petitioners had failed to satisfy the material participation test of the passive loss rule.  The losses were, therefore, passive and only deductible in accordance with those rules.  The court determined that only two of the seven tests for material participation were relevant – the 500-hour test (Treas. Reg. §1.469-5T(a)(1) and the facts and circumstances test (Treas. Reg. §1.469-5T(a)(7)).  As for the 500-hour test, the court took issue with the manner in which the petitioners documented their time spent on the ranching activity.  The court opined that their logs were merely estimates of time spent on ranch activities that were created in preparation for trial and didn’t substantiate their hours of involvement. 

As for the facts and circumstances test, the court determined that the petitioners could not satisfy the test because of the presence of the paid ranch manager.  The court made no distinction between the cattle grazing activity which the ranch manager was responsible for and the overall business operations for which the petitioners were responsible.  Indeed, on the material participation issue, due to the presence of the ranch manager, all of the personal actions and involvement of the petitioners on which the court based its determination of their profit motive were dismissed as “investor” hours.  Treas. Reg. §1.469-5T(b)(2)(ii)(A). 

Combining the passive loss rules with a hobby loss argument is not a new tactic for the IRS (it was recently utilized with respect to a Kansas ranch), but the Robison decision certainly indicates that it can be expected to be used more frequently. 

The result in Robison is that the losses will only be deductible to the extent of passive income from the activity.  Otherwise, the losses remain suspended until the petitioners dispose of their entire interest in the activity in a fully taxable transaction to an unrelated partyI.R.C. §469(g). 

Number 9 - Court Orders Chlorpyrifos Registrations Canceled

League of United Latin American Citizens v. Wheeler, 899 F.3d 814 (9th Cir. 2018).

In August, a federal appellate court ordered the EPA to revoke all tolerances and cancel all registrations for chlorpyrifos. League of United Latin American. Citizens v. Wheeler, 899 F.3d 814 (9th Cir. 2018).  The revocation and cancellation was to occur within 60-days of the court’s decision.  Chlorpyrifos is sold under many brand names but is most readily recognized as the primary ingredient in Lorsban insecticide (Dow AgroScience).  It targets pests such as soybean aphids and spider mites and corn rootworm. Chlorpyrifos is presently used on approximately 8 million soybean acres in the U.S. (approximately 10 percent of the entire U.S. planted soybean acreage).   The EPA has established chlorpyrifos tolerances for 80 food crops in the United States.  Those crops include fruits, nuts and vegetables.  Chlorpyrifos is the only effective option for control of borers in cherry and peach trees. It is also the only control for ants that affect citrus crops.  It is used on approximately 40,000 farms in the U.S.

Certain environmental and activist groups filed a petition in 2007 to force the Environmental Protection Agency (EPA) to revoke food tolerances for chlorpyrifos based on the activists’ concerns over its impact on drinking water and alleged neurological impacts on children. The Federal Food, Drug, and Cosmetic Act authorizes the EPA to regulate the use of pesticides on foods according to specific statutory standards, and grants the EPA a limited authority to establish tolerances for pesticides meeting statutory qualifications. The EPA is also subject to safety standards in exercising its authority to register pesticides under the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA).  The EPA took no action.

In 2015, the court issued a ruling regarding a 2015 petition that required the EPA to make a decision by October 31, 2015 on whether or not it would establish food tolerances for chlorpyrifos. The EPA replied that it did not have sufficient data to make a decision and, as a result, would seek to ban chlorpyrifos. In late 2015, the EPA issued a proposed rule to revoke the tolerances. However, the EPA reversed course in 2017 and left the tolerances in place citing inconsistent scientific research findings on neurodevelopmental impacts. The EPA sought more time to make a decision which would allow continued scientific research, and sought a deadline of October of 2022 as a deadline to review the registration status.  However, the court denied the request and ordered the EPA to take action by March 31, 2017. 

In early 2017, the USDA wrote to the EPA and commented on the EPA’s plan to revoke chlorpyrifos tolerances and the EPA’s underlying risk assessment that was issued in late 2016. In its letter, the expressed grave concerns about the EPA process that led the EPA to publish three wildly different human health risk assessments for chlorpyrifos within two years. The USDA also expressed severe doubts about the validity of the scientific conclusions underpinning EPA’s latest chlorpyrifos risk assessment. Even though use of the activists’ study to derive a point of departure was criticized by the Federal Insecticide Fungicide Rodenticide Act Scientific Advisory Panel, the EPA continued to rely on the activists’ study and paired it with an inadequate dose reconstruction approach. Consequently, the USDA called on the EPA to deny the activists’ petition to revoke chlorpyrifos tolerances. According to the USDA, such a denial would allow the EPA to ensure the validity of its scientific approach as part of the ongoing registration review process, without the excessive pressure caused by arbitrary, litigation-related deadlines.

The activist groups then sought review of the EPA’s administrative review process and the court granted review. The court also vacated its earlier order that EPA take action by March 31, 2017, and instructed the EPA to revoke all tolerances and cancel all registrations of chlorpyrifos within 60 days.

The EPA, however, challenged the court’s jurisdiction on the basis that the administrative process had not been completed. The EPA claimed that §346a(h)(1) of the FFDCA did not clearly state that obtaining a 24 U.S.C. §346a(g)(2)(c) order in response to administrative objections is a jurisdictional requirement. As such the 24 U.S.C. §346(g)(2)(C) administrative process deprived the court of jurisdiction until the EPA issued a response (final determinations) to activist groups’ administrative objections under 24 U.S.C. §346a(g)(2)(C). The court held that 24 U.S.C. §346a(g)(2)(C) was not jurisdictional, but was structured as a limitation on the parties rather than the court. The court also held that this case presented “strong individual interests against requiring exhaustion and weak institutional interests in favor of it.” Accordingly, the activist groups did not need to exhaust their administrative remedies. On the merits, the court held that there was no justification for the EPA's decision in its 2017 order to maintain a tolerance for chlorpyrifos in the face of scientific evidence that its residue on food causes neurodevelopmental damage to children. The court held that the EPA was in direct contravention of the FFDCA and the FIFRA.  Apparently, none of the evidence concerning the USDA’s doubts about the validity of the EPA’s health risk assessments and conclusions was before the court.

A biting dissent argued that the appellate courts have no jurisdiction in cases such as this one until the EPA makes a final determination.

The EPA has petitioned for a rehearing with the full Ninth Circuit.  The 60-day timeframe for revocation and cancellation is suspended pending the court deciding whether to rehear the case.  If a rehearing is not granted, it is anticipated that Trump Administration will ask the U.S. Supreme Court to hear the case.  In any event, it appears that Lorsban will be available to producers in 2019 as the legal proceedings continue.

Conclusion

In Friday’s post we will continue our journey through a few more of the Top Ten ag law and tax developments of 2018.  What do you think might be coming up next in the list?

January 2, 2019 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Monday, December 31, 2018

The "Almost Top Ten" Ag Law and Tax Developments of 2018

Overview

2018 was a big year for developments in law and tax that impact farmers, ranchers, agribusinesses and the professionals that provide professional services to them.  It was also a big year in other key areas which are important to agricultural production and the provision of food and energy to the public.  For example, carbon emissions in the U.S. fell to the lowest point since WWII while they rose in the European Union.  Poverty in the U.S. dropped to the lowest point in the past decade, and the unemployment rate became the lowest since 1969 with some sectors reporting the lowest unemployment rate ever.  The Tax Cuts and Jobs Act (TCJA) doubles the standard deduction in 2018 compared to 2017, which will result additional persons having no federal income tax liability and other taxpayers (those without a Schedule C or F business, in particular) having a simplified return.  Wages continued to rise through 2018, increasing over three percent during the third quarter of 2018.  This all bodes well for the ability of more people to buy food products and, in turn, increase demand for agricultural crop and livestock products.  That’s good  news to U.S. agriculture after another difficult year for many commodity prices.

On the worldwide front, China made trade concessions and pledged to eliminate its “Made in China 2025” program that was intended to put China in a position of dominating world economic production.  The North-Korea/South Korea relationship also appears to be improving, and during 2018 the U.S. became a net exporter of oil for the first time since WWII.  While trade issues with China remain, they did appear to improve as 2018 progressed, and the USDA issued market facilitation payments (yes, they are taxed in the year of receipt and, no, they are not deferable as is crop insurance) to producers to provide relief from commodity price drops as a result of the tariff battle. 

So, on an economic and policy front, 2019 appears to bode well for agriculture.  But, looking back on 2018, of the many ag law and tax developments of 2018, which ones were important to the ag sector but just not quite of big enough significance nationally to make the “Top Ten”?  The almost Top Ten – that’s the topic of today’s post.

The “Almost Top Ten” - No Particular Order

Syngenta litigation settles.  Of importance to many corn farmers, during 2018 the class action litigation that had been filed a few years ago against Syngenta settled.  The litigation generally related to Syngenta's commercialization of genetically-modified corn seed products known as Viptera and Duracade (containing the trait MIR 162) without approval of such corn by China, an export market. The farmer plaintiffs (corn producers), who did not use Syngenta's products, claimed that Syngenta's commercialization of its products caused the genetically-modified corn to be commingled throughout the corn supply in the United States; that China rejected imports of all corn from the United States because of the presence of MIR 162; that the rejection caused corn prices to drop in the United States; and that corn farmers were harmed by that market effect.  In April of 2018, the Kansas federal judge handling the multi-district litigation preliminarily approved a nationwide settlement of claims for farmers, grain elevators and ethanol plants.  The proposed settlement involved Syngenta paying $1.5 billion to the class.  The class included, in addition to corn farmers selling corn between September of 2013 and April of 2018, grain elevators and ethanol plants that met certain definition requirements.  Those not opting out of the class at that point are barred from filing any future claims against Syngenta arising from the presence of the MIR 162 trait in the corn supply.  Parties opting out of the class can't receive any settlement proceeds, but can still file private actions against Syngenta.  Parties remaining in the class had to file claim forms by October of 2018.   The court approved the settlement in December of 2018, and payments to the class members could begin as early as April of 2019. 

Checkoff programs.  In 2018, legal challenges to ag “checkoff” programs continued.  In 2017, a federal court in Montana enjoined the Montana Beef Checkoff.  In that case, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, No. CV-16-41-GF-BMM, 2017 U.S. Dist. LEXIS 95861 (D. Mont. Jun. 21, 2017), the plaintiff claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was unconstitutional.  The Beef Checkoff imposes a $1.00/head fee at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board. The plaintiff claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision was finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff. On further review by the federal trial court, the court adopted the magistrate judge’s decision in full. The trial court determined that the plaintiff had standing on the basis that the plaintiff would have a viable First Amendment claim if the Montana Beef Council’s advertising involves private speech, and the plaintiff did not have the ability to influence the advertising of the Montana Beef Council. The trial court rejected the defendant’s motion to dismiss for failure to state a claim on the basis that the court could not conclude, as a matter of law, that the Montana Beef Council’s advertisements qualify as government speech. The trial court also determined that the plaintiff satisfied its burden to show that a preliminary injunction would be appropriate. 

The USDA appealed the trial court’s decision, but the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court in 2018.  Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, 718 Fed. Appx. 541 (9th Cir. 2018).  Later in 2018, as part of the 2018 Farm Bill debate, a provision was proposed that would have changed the structure of federal ag checkoff programs.  It did not pass, but did receive forty percent favorable votes.    

GIPSA rules withdrawn.  In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) an interim final rule and two proposed regulations setting forth the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The proposals generated thousands of comments, with ag groups and producers split in their support. The proposals concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. 

The interim final rule and the two proposed regulations stemmed from 2010.  In that year, the Obama administration’s USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA. 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010).  Under the proposed regulations, "likelihood of competitive injury" was defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It included, but was not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) was stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically noted that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also specified that a PSA violation could occur without a finding of harm or likely harm to competition, contrary to numerous court opinions on the issue.

On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017, with the due date for public comment set at June 12, 2017.  However, on October 17, 2017, the USDA withdrew the interim rule.  The withdrawal of the interim final rule and two proposed regulations was challenged in court.  On December 21, 2018, the U.S. Court of Appeals for the Eighth Circuit denied review of the USDA decision.  In Organization for Competitive Markets v. United States Department of Agriculture, No. 17-3723, 2018 U.S. App. LEXIS 36093 (8th Cir. Dec. 21, 2018), the court noted that the USDA had declined to withdraw the rule and regulations because the proposal would have generated protracted litigation, adopted vague and ambiguous terms, and potentially bar innovation and stimulate vertical integration in the livestock industry that would disincentivize market entrants.  Those concerns, the court determined, were legitimate and substantive.  The court also rejected the plaintiff’s argument that the court had to compel agency action.  The matter, the court concluded, was not an extraordinary situation.  Thus, the USDA did not unlawfully withhold action. 

No ”clawback.”   In a notice of proposed rulemaking, the U.S Treasury Department eliminated concerns about the imposition of an increase in federal estate tax for decedents dying in the future at a time when the unified credit applicable exclusion amount is lower than its present level and some (or all) of the higher exclusion amount had been previously used. The Treasury addressed four primary questions. On the question of whether pre-2018 gifts on which gift tax was paid will absorb some or all of the 2018-2025 increase in the applicable exclusion amount (and thereby decrease the amount of the credit available for offsetting gift taxes on 2018-2025 gifts), the Treasury indicated that it does not. As such, the Treasury indicated that no regulations were necessary to address the issue. Similarly, the Treasury said that pre-2018 gift taxes will not reduce the applicable exclusion amount for estates of decedents dying in years 2018-2025.

The Treasury also stated that federal gift tax on gifts made after 2025 will not be increased by inclusion in the tax computation a tax on gifts made between 2018 and 2015 that were sheltered from tax by the increased applicable exclusion amount under the TCJA.  The Treasury concluded that this is the outcome under current law and needed no regulatory “fix.” As for gifts that are made between 2018-2025 that are sheltered by the applicable exclusion amount, the Treasury said that those amounts will not be subject to federal estate tax in estates of decedents dying in 2026 and later if the applicable exclusion amount is lower than the level it was at when the gifts were made. To accomplish this result, the Treasury will amend Treas. Reg. §20.2010-1 to allow for a basic exclusion amount at death that can be applied against the hypothetical gift tax portion of the estate tax computation that is equal to the higher of the otherwise applicable basic exclusion amount and the basic exclusion amount applied against prior gifts.

The Treasury stated that it had the authority to draft regulations governing these questions based on I.R.C. §2001(g)(2). The Treasury, in the Notice, did not address the generation-skipping tax exemption and its temporary increase under the TCJA through 2025 and whether there would be any adverse consequences from a possible small exemption post-2025. Written and electronic comments must be received by February 21, 2019. A public hearing on the proposed regulations is scheduled for March 13, 2019. IRS Notice of Proposed Rulemaking, REG-106706-18, 83 FR 59343 (Nov. 23, 2018).

Conclusion

These were significant developments in the ag law and tax arena in 2018, but just not quite big enough in terms of their impact sector-wide to make the “Top Ten” list.  Wednesday’s post this week will examine the “bottom five” of the “Top Ten” developments for 2018. 

December 31, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Wednesday, November 21, 2018

How Long Can a Train Block a Crossing?

Overview

An issue for all motorists, but one of particular interest to motorists using rural roadways is the length of time that a train can block a crossing.  In rural areas, there may be few (if any) options for detouring around a blocked crossing. 

Many states (and some towns and municipalities) have statutes the denote the maximum length of time that a train can block a crossing.  But, can state law regulate the length of time a train blocks a crossing?  Is the issue a matter of federal law?  That’s the topic of today’s post – train blockage of crossings and how state and federal law deals with the issue.

State Laws

Many states have statutes that specify the maximum length of time that a train can block a public roadway grade crossing.  The state laws vary, but a general rule of thumb is that a blockage cannot exist for more than 20 minutes.  There are numerous exceptions, of course, that concern such things as emergencies and when the blockage is a result of something beyond the control of the railroad.  In addition, in states that don’t have a state law addressing the issue, there may be restrictions at the local level – cities, towns, villages and municipalities. 

Here's a sample of a few state rules on the issue:

In Arizona, if an engineer, conductor or other employee of a railroad permits a locomotive or railcars to be or remain on a crossing of a public highway or over the railway in a manner that obstructs travel over the crossing for longer than 15 minutes is guilty of a class 2 misdemeanor.  Ariz. Rev. Stat.  §40-852.  An exception is provided for an “unavoidable accident.”  See also Terranova v. Southern Pacific Transportation Company, 158 Ariz. 125, 761 P.2d 1029 (1988).

Under Iowa law, a ten-minute maximum is the rule.  Iowa Code §327G.32.  Exceptions are provided when a blockage longer than ten minutes is required for the railroad to comply with signals affecting the safety of the movement of the train; when the train is disabled; or when it is necessary to comply with governmental safety regulations including but not limited to speed ordinances and speed regulations.  Interestingly, a railroad employee is not subject to penalty under the provision if they were acting on orders of a supervisor or the railroad in general.  In that case, the penalty for violating the law applies to the railroad.  The Iowa provision also says that a political subdivision of the state may pass an ordinance dealing with the matter if it for a public safety purpose. 

The Indiana law is similar to the Iowa law.  In Indiana, public travel cannot be blocked for more than 10 minutes by any train, railroad car, or engine.  Indiana Code §8-6-7.5-1.  There are exceptions from the 10-minute rule in situations where the train, railroad car or engine cannot be moved by reason of uncontrollable circumstances.  In addition, a railroad cannot permit successive train movements to obstruct vehicular traffic at a highway grade crossing until all vehicular traffic that has already been delayed by a train has been allowed at least five minutes to clear.  Violations of the law constitutes a “Class C infraction.”  The penalty is generally imposed on the railroad corporation. 

Nebraska, the home of Union Pacific Railroad, has a very detailed, lengthy statute dealing with the issue.  A train obstruction of a public highway, street or alley in any unincorporated town or village in the state is prohibited beyond 10 minutes.  Neb. Rev. Stat. §17-225.  The penalty for violation is a fine of $10 to $100.  In addition, any members of a train crew, yard crew, or engine crew cannot be held personally responsible for any violation if they were acting on orders by their employer.  It is the railroad that bears the responsibility to comply with the law.  Neb. Rev. Stat. §17-594.  Nebraska law also states that at crossings, a train cannot be stored or parked in a manner that obstructs the motoring public’s view of an oncoming train.  Neb. Rev. Stat. §74-1323.  Violation of the Nebraska provision is coupled with a minimal penalty – Class IV misdemeanor with a maximum fine of $200 for each offense (every day constitutes a separate offense). 

Does Federal or State Law Control?

An interesting question involves the extent to which the state laws on public roadway grade crossing blockage laws are valid.  Railroads are subject to an interesting mix of federal and state law.  Does federal law preempt state law on this issue?  That was the question presented in a recent Kansas case.

In State of Kansas v. Burlington Northern Santa Fe Railway Company, No. 118,095, 2018 Kan. App. LEXIS 63 (Kan. Ct. App. Nov. 2, 2018). Burlington Northern Santa Fe Railway (BNSF) operates trains through Bazaar (an unincorporated community) in Chase County, Kansas. At issue were two railroad crossings where the main line and the side lines crossed county and town roads. The side line is used to change crews or let other trains by on the main line. Early one morning, the Chase County Sherriff received a call that a train was blocking both intersections. The Sherriff arrived on scene two hours later and spoke with a BNSF employee. This employee said that he was checking the train but did not state when the train would move. The Sherriff then called BNSF three times. The train remained stopped on both crossings for approximately four hours. The Sherriff issued two citations (one for each engine) under K.S.A. 66-273 for blocking the crossings for four hours and six minutes.

K.S.A. 66-273 prohibits railroad companies and corporations operating a railroad in Kansas from allowing trains to stand upon any public roadway near any incorporated or unincorporated city or town in excess of 10 minutes at any one time without leaving an opening on the roadway of at least 30 feet in width. BNSF moved to dismiss the citation, but the trial court rejected the motion. During the trial, many citizens presented evidence that they could not get to work that day and a service technician could not reach a home that did not have hot water and was having heating problems. BNSF presented train logs for one of the engines. These logs showed that one engine was only stopped in Bazaar for 8 minutes to change crews and was not in Bazaar at 9:54 a.m. The Sheriff later conceded that he might have mistaken the numbers on the engines for the citations. There were no train logs for the other engine. BNSF also stated there could be other alternatives from blocking the crossings but uncoupling the middle of the train would be time consuming and unsafe. The trial court ruled against BNSF and entered a fine of $4,200 plus court costs.

On appeal, BNSF claimed that the Interstate Commerce Commission Termination Act (ICCTA) and Federal Railroad Safety Act (FRSA) preempted Kansas law, and that the evidence presented was not sufficient to prove a violation of Kansas Law. The appellate court agreed, holding that the ICCTA, by its express terms contained in 49 U.S.C. 10501(b), preempted Kansas law. While the appellate court noted that the Kansas statute served an “admirable purpose,” it was too specific in that it applied only to railroad companies rather than the public at large. Also, the statute had more than a remote or incidental effect on railway transportation. As a result, the Kansas law infringed on the Surface Transportation Board’s exclusive jurisdiction to regulate the railways in the United States. The court noted that the Surface Transportation Board was created by the ICCTA and given exclusive jurisdiction over the construction, acquisition, operation, abandonment, or discontinuance of railroad tracks and facilities. In addition, the appellate court noted that the Congress expressly stated that the remedies with respect to regulation of rail transportation set forth in the ICCTA are exclusive and preempt other remedies provided under federal or state law The appellate court did not consider BNSF’s other arguments. 

Conclusion

The Kansas case indicates that state law may have to be carefully tailored to apply broadly to roadway obstructions generally, and not have anything more than a slight impact on railway transportation.  If those requirements are not satisfied, federal law may control.

Have a blessed Thanksgiving.  I will not be posting on Friday this week.  The next post will be on Tuesday Nov. 27.

November 21, 2018 in Regulatory Law | Permalink | Comments (0)

Wednesday, November 7, 2018

“Waters of the United States” Means “Frozen Soil”?

Overview

Section 404 of the Clean Water Act (CWA) makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE). 33 U.S.C. §§1311(a); 1362(6),(12).  The definition of what a WOTUS has been confusing and controversial in recent years.  How is a wetland that could be a WOTUS delineated?  What force do definitions contained in a COE manual have?  What about supplements?   

How the government defines a “WOTUS” – that’s the focus of today’s post.

Regulatory Definitions

The regulatory definition of a “wetland” has changed over the years.  In its 1987 Manual for delineating wetlands, before the COE may assert jurisdiction over property, it must find the area satisfies the three wetland criteria of hydric soil, predominance of hydrophytic vegetation, and wetland hydrology (soil saturation/inundation).  Wetland hydrology under the 1987 Manual requires either the appropriate inundation during the growing season or the presence of a primary indicator.  Table 5 of the 1987 Manual indicates a nontidal area is not considered to evidence wetland hydrology unless the soil is seasonally inundated or saturated for 12.5 percent to 25 percent of the growing season.  A “growing season” is defined as a season in which soil temperature at 19.7 inches below the surface is above 41 degrees Fahrenheit. 

The 1987 Manual lists six field hydrologic indicators, in order of decreasing reliability, as evidence that inundation and/or soil saturation has occurred: (1) visual observation of inundation; (2) visual observation of soil saturation; (3) watermarks; (4) drift lines; (5) sediment deposits; and (6) drainage patterns within wetlands.

In 1989, the COE adopted a new manual.  The 1989 Manual superseded the 1987 Manual.  The delineation procedures contained in the 1989 manual were less stringent.  Thus, it became more likely that the COE could determine that a particular tract contained a regulable wetland.  This change in delineation techniques caught the attention of the Congress which barred the use of the 1989 Manual via the 1992 Budget Act.  Pub. L. No. 102-104, 105 Stat. 510 (Aug. 17, 1991).  Specifically, the 1992 Budget Act prohibited the use of funds to delineate wetlands under the 1989 Manual "or any subsequent manual not adopted in accordance with the requirements for notice and public comment of the rulemaking process of the Administrative Procedure Act." The 1992 Budget Act also required the Corps to use the 1987 Manual to delineate any wetlands in ongoing enforcement actions or permit application reviews. In the 1993 Budget Act, the Congress again addressed the issue by stating that, “None of the funds in this Act shall be used to identify or delineate any land as a "water of the United States" under the Federal Manual for Identifying and Delineating Jurisdictional Wetlands that was adopted in January 1989 or any subsequent manual adopted without notice and public comment.  Furthermore, the Corps of Engineers will continue to use the Corps of Engineers 1987 Manual, as it has since August 17, 1991, until a final wetlands delineation manual is adopted.”  Thus, it was clear that Congress mandated that the COE continue to use the 1987 Manual to delineate wetlands unless and until the COE utilized the formal rulemaking process to change the delineation procedure. 

While the Congress mandated the use of the 1987 Manual to delineate wetlands, it also appropriated funds to the U.S. Environmental Protection Agency (EPA) to contract with the National Academy of Sciences for a review and analysis of wetland regulation at the federal level.  See Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act of 1993, Pub. L. 102-389, 106 Stat. 1571 (Oct. 6, 1992); H.R. Rep. No. 102-710, at 51 (1992); H.R. Conf. Rep. No. 102-902 at 41. This resulted in a report being published in 1995 containing a suggestion that the 1987 Manual either eliminate the requirement of a “growing season” approach to wetland hydrology or move to a region-specific set of criteria for delineating wetlands.  Consequently, the COE began issuing regional “supplements” to the 1987 Manual that provided criteria for wetland delineation that varied across the country.  For instance, in the COE’s 2007 Alaska Supplement, the COE eliminated the measure of soil temperature contained in the 1987 Manual and replaced it with “vegetation green-up, growth, and maintenance as an indicator of biological activity occurring both above and below ground.”   The 2007 Supplement was updated in 2008.

Alaska Case

The 1987 Manual and the budget bills and COE region-specific Supplements were the issue of a recent case.  In Tin Cup, LLC v. United States Army Corps of Engineers, No. 17-35889, 2018 U.S. App. LEXIS 27085 (9th Cir. Sept. 21, 2018), the plaintiff was a closely-held family pipe fabrication company in Alaska that sought to relocate its business for expansion purposes.  The plaintiff found a suitable location (a 455-acre tract in North Pole) where it would need to lay gravel and construct buildings as well as a railroad spur.  Because gravel is contained within the regulatory definition of “pollutant” under the CWA and because the tract was purportedly a “wetland,” the plaintiff had to obtain a discharge permit so that it could place gravel fill on the property before starting construction. 

The plaintiff received a permit in 2004 and, pursuant to that permit, cleared about 130 acres from the site.  In 2008, the plaintiff submitted another permit application to place gravel fill on the site.  The COE issued a new jurisdictional determination in 2010, concluding that wetlands were present on 351 acres, including about 200 acres of permafrost – frozen soil.  The COE granted the plaintiff a discharge permit to place gravel fill on 118 acres, but included mitigation conditions that the plaintiff objected to.  The plaintiff sued on the basis that the COE’s delineation of permafrost as a wetland was improper and, thus, a discharge permit was not necessary. 

The COE delineated the permafrost on the tract as wetland based on its 2008 Alaska Supplement. U.S. Army Corps of Engineers, Regional Supplement to the Corps of Engineers Wetland Delineation Manual: Alaska Region (Version 2.0) (Sept. 2007).  However, the COE’s 1987 Manual specifically excludes permafrost from the definition of a wetland.  The plaintiff argued that the Congress had instructed the COE to continue to use the wetland delineation standards in the 1987 Manual until the COE adopted a “final wetland delineation manual” as set forth in the 1992 and 1993 Budget Acts, as noted above.  Thus, because permafrost does not have the required “growing season” (it never reached 41 degrees Fahrenheit at a soil depth of 19.7 inches) it cannot be a wetland.  The plaintiff pointed out that by virtue of the issuance of regional supplements to the 1987 Manual, the COE had expanded its jurisdiction over private property by modifying the definition of a “wetland.”  Key to the plaintiff’s argument was the point that the Supplement was not a new manual that had been developed in accordance with the formal rulemaking process (e.g., notice, comment, and public hearing).  It also was never submitted to the Congress and the Government Accountability Office which, the plaintiff noted, the Congressional Review Act requires before any federal governmental agency rule can become effective.  5 U.S.C. Ch. 8, Pub. L. No. 104-121, §201. 

The trial court ruled against the plaintiff, holding that the COE could rely on the 2008 Supplement when delineating a wetland and determining its jurisdiction.  The trial court determined that the Budget Acts have no force beyond the funds that they appropriate.  That meant that the COE could delineate wetlands in accordance in whatever manner it determined – the 1987 Manual or any subsequent Manual or supplemental guidance that it issued. 

On appeal, the appellate court affirmed, holding that the 1993 Budget Act did not require the COE to continue using the 1987 Manual to delineate wetlands.  The appellate court stated that there is a “very strong presumption” that if an appropriations act changes substantive law, it does so only for the fiscal year for which the bill is passed” unless there is a clear statement of futurity. Because the 1993 Budget Act contained no such statement, the Court held that the requirement for use of the definition of a growing season in accordance with the 1987 Manual expired at the end of the 1993 fiscal year.

One of the appellate judges, while concurring with the decision that the lower court did not err in granting summary judgment to the COE, disagreed that the 1993 Budget Act didn’t apply beyond the 1993 fiscal year.  This judge noted that the Congress, in the 1993 Budget Act, specifically directed the COE to continue to use the 1987 Manual “until” it adopted a final wetlands delineation manual.  According to this judge, that was a sufficient Congressional directive of futurity that made the directive applicable beyond the Federal Government’s 1993 fiscal year.

Conclusion

The definition of a “wetland” and “WOTUS” is confusing and controversial.  The Ninth Circuit’s holding that the COE can conclude that frozen soil is a navigable water will not diminish that controversy.  The issue of the application of congressional budget act provisions is also one that there is not agreement upon within the federal appellate courts.  Perhaps the U.S. Supreme Court will hear the case. 

As for me, I am going to read my copy of Alice in Wonderland.  It might make more sense than concluding that gravel is pollution and frozen dirt is water and when the Congress says not to do something, you can.

November 7, 2018 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Thursday, October 18, 2018

Agricultural Law Online!

Overview

For the Spring 2019 academic semester, Kansas State University will be offering my Agricultural Law and Economics course online. No matter where you are located, you can enroll in the course and participate in it as if you were present with the students in the on-campus classroom.
Details of next spring’s online Ag Law course – that’s the topic of today’s post.

Course Coverage

The course provides a broad overview of many of the issues that a farmer, rancher, rural landowner, ag lender or other agribusiness will encounter on a daily basis. As a result, the course looks at contract issues for the purchase and sale of agricultural goods; the peril of oral contracts; the distinction between a lease and a contract (and why the distinction matters); and the key components of a farm lease, hunting lease, wind energy lease, oil and gas lease, and other types of common agricultural contractual matters. What are the rules surrounding ag goods purchased at auction?

Ag financing situations are also covered – what it takes to provide security to a lender when financing the purchase of personal property to be used in the farming business. In addition, the unique rules surrounding farm bankruptcy is covered, including the unique tax treatment provided to a farmer in Chapter 12 bankruptcy.

Of course, farm income tax is an important part of the course. Tax planning is perhaps the most important aspect of the farming business that every day decisions have an impact on and are influenced by. As readers of this blog know well, farm tax issues are numerous and special rules apply in many instances. The new tax law impacts many areas of farm income tax.

Real property legal issues are also prevalent and are addressed in the course. The key elements of an installment land contract are covered, as well as legal issues associated with farm leases. Various types of interests in real estate are explained – easements; licenses; profits, fee simples, remainders, etc. Like-kind exchange rules are also covered as are the special tax rules (at the state level) that apply to farm real estate. A big issue for some farmers and ranchers concerns abandoned railways, and those issues are covered in the course. What if an existing fence is not on the property line?
Farm estate and business planning is also a significant emphasis of the course. What’s the appropriate estate plan for a farm and ranch family? How should the farming business be structured? Should multiple entities be used? Why does it matter? These questions, and more, are addressed.

Agricultural cooperatives are important for the marketing of agricultural commodities. How a cooperative is structured and works and the special rules that apply are also discussed.

Because much agricultural property is out in the open, that means that personal liability rules come into play with respect to people that come onto the property or use farm property in the scope of their employment. What are the rules that apply in those situations? What about liability rules associated with genetically modified products? Ag chemicals also pose potential liability issues, as do improperly maintained fences? What about defective ag seed or purchased livestock that turns out to not live up to representations? These issues, and more, are covered in the scope of discussing civil liabilities.

Sometimes farmers and ranchers find themselves in violation of criminal laws. What are those common situations? What are the rules that apply? We will get into those issue too.

Water law is a very big issue, especially in the western two-thirds of the United States. We will survey the rules surrounding the allocation of surface water and ground water to agricultural operations.

Ag seems to always be in the midst of many environmental laws – the “Clean Water Rule” is just one of those that has been high-profile in recent years. We will talk about the environmental rules governing air, land, and water quality as they apply to farmers, ranchers and rural landowners.
Finally, we will address the federal (and state) administrative state and its rules that apply to farming operations. Not only will federal farm programs be addressed, but we will also look at other major federal regulations that apply to farmers and ranchers.

Further Information and How to Register

Information about the course is available here:
https://eis.global.ksu.edu/CreditReg/CourseSearch/Course.do?open=true&sectionId=127126

You can also find information about the text for the course at the following link (including the Table of Contents and the Index):
https://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

If you are an undergraduate student at an institution other than Kansas State, you should be able to enroll in this course and have it count as credit towards your degree at your institution.  Consult with your academic advisor to see how Ag Law and Economics will transfer and align with your degree completion goals.

If you have questions, you can contact me directly, or submit your questions to the KSU Global Campus staff at the link provided above.

I hope to see you in January!

Checkout the postcard (401 KB PDF) containing more information about the course and instructor.

KStateAgriculturalLawandEconomicsPostcard

October 18, 2018 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)

Tuesday, September 4, 2018

Roadkill – It’s What’s For Dinner

Overview

On occasion I get a question about whether it is permissible to pick up roadkill.  Often, the question is in relation to big game such as deer or bear or moose.  But, other times the question may involve various types of furbearing animals such as coyotes, racoons or badgers.  I don’t get too many roadkill questions involving small game.  That’s probably because when small game is killed on the road, it is either not wanted or the party hitting it simply assumes that there is no question that it can be possessed.

There are many collisions involving wildlife and automobiles every year.  One estimate by a major insurance company projects that one out of every 169 motorists in the U.S. will hit a deer during 2018.  That’s a projected increase of three percent over 2017, with an estimated 1.3 million deer being hit. 

If a wild animal is hit by a vehicle, the meat from the animal is the same as that from animal meat obtained by hunting – assuming that the animal is not diseased.  So, in that instance, harvesting roadkill is a way to get free food – either for personal consumption or to donate to charity.  

What are the rules and regulations governing roadkill?  That’s the topic of today’s post.

State Rules

Many states have rules on the books concerning roadkill.  Often, the approach is for the state statutes and the regulatory body (often the state Department of Game and Fish (or something comparable)) to distinguish between "big game," "furbearing animals" and "small game."  This appears to be the approach of Kansas and a few other states.  Often a salvage tag (e.g., “permit”) is needed to pick up big game and turkey roadkill.  This is the approach utilized in Iowa and some other states.  If a salvage tag is possessed, a hunting license is not required.  For furbearing animals such as opossums and coyotes that are roadkill, the typical state approach is that these animals can only be possessed during the furbearing season with a valid fur harvester license.  As for small game, the typical state approach is that these roadkill animals can be possessed with a valid hunting license in-season.  But variations exist from state-to-state. 

An approach of several states is to allow the collection of roadkill with a valid permit.  That appears to be the approach in Colorado, Georgia, Idaho, Illinois, Indiana, Maryland, New Hampshire, North Dakota, New York, Ohio, Pennsylvania and Tennessee.  Other states require the party hitting wildlife and collecting the roadkill to report the incident and collection within 24 hours.  Other states may limit roadkill harvesting to licensed fur dealers.  In these states (and some others), the general public doesn’t have a right to collect roadkill.  In Texas, roadkill-eating is not allowed (although a legislative attempt to remove the ban was attempted in 2014).  South Dakota has legislatively attempted to make roadkill public property.  Wyoming requires a tag be received from the game warden for possessing big game roadkill.  Oregon allows drivers to get permits to recover, possess, use or transport roadkill. 

Other states (such as Alabama) may limit roadkill harvesting to non-protected animals and game animals, and then only during open season.  The Alaska approach is to only allow roadkill to be distributed via volunteer organizations.  A special rule for black bear roadkill exists in Georgia.  Illinois, in certain situations requires licenses and a habitat stamp.  Massachusetts requires that roadkill be submitted for state inspection, and New Jersey limits salvaging roadkill to deer for persons with a proper permit. 

In all states, federally-protected species cannot be possessed.  If a question exists about the protected status of roadkill, the safest approach is to leave it alone.  Criminal penalties can apply for mere possession of federally protected animals and birds.  Similarly, if a vehicle does significant enough damage to wildlife that the animal’s carcass cannot be properly identified to determine if the season is open for that particular animal (in those states that tie roadkill possession to doing so in-season) the recommended conduct is to not possess the roadkill.   

In the states that have considered roadkill legislation in recent years, proponents often claim that allowing licensed hunters to take (subject to legal limits) a fur-bearing animal from the roadside would be a cost-saving measure for the state.  The logic is that fewer state employees would be required to clean-up dead animal carcasses.  Opponents of roadkill bills tend to focus their arguments on safety-related concerns – that having persons stopped alongside the roadway to collect dead animals would constitute a safety hazard for other drivers.  That’s an interesting argument inasmuch as those making this claim would also appear to be asserting that a dead animal on a roadway at night is not a safety hazard.  Others simply appear to argue that collecting roadkill for human consumption is disgusting. 

Conclusion

There is significant variation among state approaches with respect to possession of roadkill.  That means that for persons interested in picking up roadkill, researching applicable state law and governing regulations in advance would be a good idea.  For roadkill that is gleaned from a roadway that is used for human consumption, care should be taken in preparation and cooking.  The present younger generation typically doesn’t have much experience dining on racoon (they tend to be greasy), opossum shanks and gravy, as well as squirrel.  But, prepared properly, some view them as a delicacy. 

To date, the USDA hasn’t issued guidelines on the proper preparation of roadkill or where roadkill fits in its food pyramid (that was revised in recent years).  That’s sounds like a good project for some USDA Undersecretary for Food Safety to occupy their time with.

September 4, 2018 in Civil Liabilities, Regulatory Law | Permalink | Comments (0)

Wednesday, August 29, 2018

Ag Employment – Verifying The Legal Status of Employees

Overview

In late 2016, I blogged on the issue of what ag employers need to do to verify employment and provided a survey of the primary employment laws and their application to agricultural employers.  The issue has increased in importance recently, so it’s a good time to brush the dust off that blog post and update it.

Verifying the legal status of ag employees – that’s the topic of today’s post.

Ag Employment Data

Most estimates peg the total number of persons working on farms and ranches in the United States at approximately 3 million. Hired farm workers make up approximately one-third of that total.  Of that number, about half are full-time workers, and about twenty-five percent are ag service workers that are contract hires.  A slight majority of the hires work in crop agriculture with the balance working in the livestock industry.  Two states – California and Texas account for more than a third of all farmworkers.  According to the USDA data, 59 percent of farm laborers and supervisors are U.S. citizens (compared to 91 percent for all U.S. workers).  The data also show that about 70 percent of hired crop farmworkers were born in Mexico. 

According to the National Agricultural Worker Survey (NAWS), approximately 48 percent of farmworkers lack work authorization. However, this estimate may be low due to a variety of factors.  But, this number is likely low because a worker not in the country legally may not complete the survey or may complete it untruthfully.  Due to this, estimates assert that at least 70 percent of the ag workforce is not working in the United States legally.  Over 90 percent of the ag immigrant labor comes from Mexico.

This presents a very real problem for ag employers.   

Form I-9

In late 2016, the U.S. Citizenship and Immigration Service (USCIS) updated Form I-9 and the related instructions.  Beginning on January 22, 2017, the update Form I-9 became mandatory for employers to use when hiring persons. 

The Form is used for verifying the identity and employment authorization of individuals hired for employment in the U.S.  All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the U.S., whether the employment involves citizens or noncitizens.  While agriculture is often exempt from or treated differently in many situations, that is not the case with respect to Form I-9.  There is no exception based on the size of the farming operation or for farming businesses where a majority of the interests are held by related persons. 

Form I-9 applies to employment situations.  It doesn’t apply to situations where a farmer hires custom work or other work to be done on an independent contractor basis.  Whether a situation involves the hiring of an employee or an independent contractor basically comes down to the issue of control over the work.  If the farmer controls the means and method of the work, then it’s likely to be an employment situation that will trigger the use of Form I-9. 

Completing the form.  Both employees and employers (or an employer’s authorized representative) must complete the form within three days of the hire. On the form, an employee must attest to their employment authorization. The employee must also present his or her employer with acceptable documents evidencing identity and employment authorization. The employer must examine the employment eligibility and all identity documents an employee presents to determine whether the documents reasonably appear to be genuine and relate to the employee.  The employer must also record the document information on the Form I-9. The list of acceptable documents can be found on page three of Form I-9. Employers must retain Form I-9 for a designated period and make it available for inspection by authorized government officers. 

The form itself is comprised of three sections. 

  • Section 1 is for the reporting of employee information and attesting to that information. The employee has to attest that they are a citizen, a noncitizen national of the U.S., a lawful permanent resident or an alien that is authorized to work until the time specified in the document.  If the employee is an alien that is authorized to work, they must provide their alien registration number/USCIS number or their Form I-94 admission number, or their foreign passport number and list the country of issuance.  The employee must sign the form and date it.  Likewise, the employer must also sign and date the form and provide their address.  The employee selects the appropriate Citizenship/Immigration status in this section.  Also, the new Form I-9 contains a box where the employee indicates if they did not use a translator or preparer in completing Section 1.
  • Section 2 is a certification of the employer’s review and verification of the documents of the new hire. On the new form, there is a “Citizenship/Immigration Status” field where the employer is to select (or write) the number that corresponds with the Citizenship/Immigration status that the employee selected in Section 1.
  • Section 3 pertains to reverifications and rehires. This section lists the acceptable documents that employees can select from to establish their identity and their employment authorization.

The form is to be completed in English, unless it involves and employer and employees that are in Puerto Rico.

Filing the form.  The I-9 doesn’t get filed with any government agency.  It doesn’t get filed with the USCIS or the U.S. Immigration and Customs Enforcement (ICE).  Instead the employer simply keeps the completed Form I-9 on file for each person on their payroll who is required to complete the form. An employer has to retain Form I-9 for three years after the date of hire or for one year after employment is terminated, whichever is later.  It must also be made available for inspection by authorized U.S. Government officials from the Department of Homeland Security, Department of Labor, or Department of Justice.

The form can be completed via computer, but it is not an electronic Form I-9 that is subject to the electronic Form I-9 storage regulations.  Instead, Form I-9 is to be printed, signed and stored as a hard copy.  If it is completed on a computer, the new form has new drop-down screens, field checks and instructions that are easily accessible. 

Penalties.  In 2016, the U.S. Department of Justice increased the penalties that can be imposed on employers that hire illegal immigrants.  The minimum penalty for a first offense is now $539 (up from $375) and the maximum penalty is $4,313 (up from $3,200).  These new amounts are effective August 1, 2016.  The minimum penalty for failing to comply with the Form I-9 employment verification requirements is $216 for each form (first offense) and the maximum penalty is $2,156 per form.  There are also other penalties that can apply, and the failure to complete the Form I-9 paperwork properly and completely can lead to multiple fines getting stacked together.  For example, in 2015, an employer was ordered to pay a fine of over $600,000 for more than 800 Form I-9 violations.  The fines were primarily the result of the failure of the employer to sign Section 2 of Form I-9.  That’s the section, as noted above, where the employer certifies within three days of a hire that the employer has reviewed the verification and employment authorization documents of a new hire.  The penalties arose from the hire of union employees who worked for the employer on a project-by-project basis during the term of a collective bargaining agreement.  The workers were not terminated when they completed a project and remained “on-call.”  The employer didn’t complete a separate Form I-9 apart from what the union provided and didn’t sign Section 2 of the union form.     

Mistakes. So, with the possibility for penalties for improper completion of Form I-9, what are the biggest potential areas of pitfalls?  Some basic ones come to mind – incorrect dates, missing signatures, transposed numbers and not checking boxes properly.  Also, the correct document codes have to be recorded for each identification method.  An employer should also make sure to ask for only those documents that are necessary to identify the employee.  Not too many or too few.  Requesting too many can lead to a charge of discrimination; too few can trigger a violation for an incomplete form. 

Other mistakes can include failure to comply with the three-day rule, failure to re-verify and get updated documents from employees.  Also, it is a good idea to get rid of outdated forms.  Any outdated forms that exist can lead to penalties if discovered in an audit. 

E-Verify

E-Verify is a web-based system operated by the Department of Homeland Security (DHS).  The system allows an employer to confirm the eligibility of an employee to work in the United States.  E-Verify involves an electronic match of identity and employment eligibility of new hires.  The system matches the Form I-9 information against the records of the Social Security Administration and the Department of Homeland Security.

The E-Verify system is not mandatory (except for federal contractors, vendors and agencies).  However, employers use it to make sure that a new hire is in compliance with federal law.  It is a no-charge system.  More than 600,000 employers used the E-Verify system in 2016.

States can mandate the use of E-Verify.  While federal law generally pre-empts most state authority on immigration, it does not do so with respect to licensing and similar laws.  Indeed, a challenge to the Arizona law requiring a business to use E-Verify or lose its state business license upon hiring a worker not in the United States legally failed when the U.S. Supreme Court held that federal law did not pre-empt the Arizona law.  United States Chamber of Commerce v. Whiting, 563 U.S. 582 (U.S. 2011).  Iowa, for example, has made numerous attempts to pass legislation requiring employers to utilize the E-Verify system with no success.  The Iowa legislation, most recently S.F. 412 introduced during the 2018 legislative session, was modeled after the Arizona legislation. 

 

Conclusion

The proper documentation of employees is critically important.  There are indications that the federal government is now looking more closely at employer hiring practices.  That makes compliance with Form I-9 requirements even more important.  In addition, it makes sense for an ag employer to utilize the E-Verify system.  Failure to do so could result in really bad consequences for the business. 

August 29, 2018 in Regulatory Law | Permalink | Comments (0)

Wednesday, July 18, 2018

Agricultural Law and Economics Conference

Overview

Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture.  The event will be held in Manhattan at the Kansas Farm Bureau headquarters.  The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics.  The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics.  That event will be on the KSU campus in Manhattan.  The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.  

Symposium

This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills. 

The symposium can also be attended online.  For a complete description of the sessions and how to register for either in-person or online attendance, click here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Risk and Profit Conference

On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus.  The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture.  One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis.  The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law.  For a complete run down of the conference, click here:  https://www.agmanager.info/risk-and-profit-conference

Conclusion

The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic.  If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan.  See you there, or online for Day 1.

July 18, 2018 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, July 2, 2018

Regulation of Wetlands and “Ipse Dixit" Determinations

Overview

Over two thousand years ago, the Roman philosopher Cicero coined a phrase for opinions not supported by facts.  “Ipse dixit” is Latin for “he said it himself.”  It’s an assertion without proof, with the person (or entity) making the assertion claiming that a matter is because the party making the assertion said it is.  

In a recent case involving wetlands, the court determined that the U.S. Army Corps of Engineers (Corps) claimed jurisdiction over “wetlands” without any supporting evidence.  It was a wetland because the Corps said it was a wetland – an “ipse dixit” determination.  The court set the Corps’ determination aside.

This isn’t the first time this has happened.  In 1998, the USDA/NRCS did the same thing in a Nebraska case involving ditch maintenance of a hay meadow caught up in the Swampbuster regulations.

“Ipse dixit” determinations involving wetlands – that’s today’s blog post topic.

Farmed Wetlands and Swampbuster

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “Swampbuster.”  In 1986, the interim rules for Swampbuster were published in the Federal Register and evidenced general compliance with congressional intent and made no mention of “farmed wetland.”  However, the final rules published in 1987 introduced the concept of “farmed wetland,” defining a farmed wetland as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics.  Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b). The USDA/NRCS has interpreted this as meaning that farmed wetland can be used as it was before December 23, 1985 (National Food Security Act Manual (NFSAM) § 514.23), and a hydrologic manipulation can be maintained to the same “scope and effect” as before December 23, 1985. Id. § 515.10(a).  In particular, the government has interpreted the “scope and effect” regulation such that the depth or scope of drainage ditches, culverts or other drainage devices be preserved at their December 23, 1985, level regardless of the effect any post-December 23, 1985, drainage work actually had on the land involved. 

Nebraska case.  However, in 1999, the Eighth Circuit Court of Appeals invalidated the government’s interpretation of the “scope and effect” regulation.  The court held that a proper interpretation should focus on the status quo of the manipulated wetlands rather than the drainage device utilized in post-December 23, 1985, drainage activities.  Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999)

In Barthel, to determine the original scope and effect of the manipulation, the USDA focused solely on the depth of the ditch that drained the hay meadow at issue.  In essence, the USDA interpreted the manipulation to be the ditch. The USDA pointed out that the level of the culvert (that drained the ditch beneath a road) on or before December 23, 1985, was eighteen inches higher than at the time of the litigation.  The USDA took the position that the culvert could only be placed at that higher level.  At that level, the meadow would not drain and the plaintiff’s land was flooded. 

The USDA/NRCS claimed it had the authority to “determine the scope and effect of [the] original manipulation” by selecting “any pre-December 23, 1985, manipulation ‘which can be determined by reliable evidence.’” Thus, if the agency had reliable evidence about the ditch level in 1965, then the Barthels would be stuck with those findings, even if in 1983 (still before the effective date of the Act), more far reaching modifications were made. The appellate court disagreed, noting that it was presented with a factual setting that was cyclical.  The court noted that the record showed that the ditch was continually silted-in by natural conditions and animal traffic and must be periodically cleaned out.  The court then stated that if it accepted “the government’s argument, the USDA could select a level for the original manipulation, either intentionally or unintentionally, which is at the end of the natural cycle - just before the periodic clean-up.  This would essentially redefine the cycle.  Thus, in the government’s view, if partial flooding occurred just before the clean-up, the flood level would be the best the Barthels could expect for use of their land.  An ipse dixit determination like this would drastically reduce the use of the land and even leave it underwater - reviving a wetland [citation omitted].  This interpretation conflicts with the Act considered as a whole.” 

Wetland and the Clean Water Act

In 1993, the COE and EPA adopted new regulations clarifying the application of the permit requirement of §404 of the CWA to land designated as wetland.  Section 404 of the CWA makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without obtaining a permit from the Secretary of the Army acting through the Corps.  The regulations specifically exempt prior converted wetlands from the definition of “navigable waters” for CWA purposes. 58 Fed. Reg. 45,008-48,083 (1993); 33 C.F.R. §328.3(a)(8).  Thus, prior converted cropland is not subject to the permit requirements of § 404 of the CWA.  Indeed, the Corps stated clearly that the only method for prior converted cropland to return to the Corps’ jurisdiction under the regulation was for the cropland to be “abandoned” – cropland production ceases with the land reverting to a wetland. 

In early 2009, the Corps prepared an Issue Paper announcing for the first time that prior converted cropland that is shifted to non-agricultural use becomes subject to regulation by the Corps. See Issue Paper Regarding "Normal Circumstances" (ECF No. 18-22).  The paper was the Corps’ response to five pending applications for jurisdictional determinations involving the transformation of prior converted cropland to limestone quarries. The paper concluded that the transformation would be considered an "atypical situation" within the meaning of the Corps’ Wetlands Manual and, thus, subject to regulation.  The paper further found that active management, such as continuous pumping to keep out wetland conditions, was not a "normal condition" within the meaning of 33 C.F.R. § 328.3(b).  However, no APA notice-and-comment period occurred (as required by the Administrative Procedure Act (APA) – Pub. L. 79-404, 69 Stat. 237, enacted Jun. 11, 1946)) before the Corps issued the memorandum.  Even so, the Corps implemented and enforced the rules nationwide.  The rules were challenged and in New Hope Power Company, et al. v. United States Army Corps of Engineers, 746 F. Supp.2d 1272 (S.D. Fla. Sept. 2010), the court held that the Corps had improperly extended its jurisdiction over the prior converted croplands that were converted to non-agricultural use and where dry lands were maintained using continuous pumping.  Under the Corp’s new rule, wetland determinations were being made based on what a property’s characteristic would be if pumping ceased.  The court noted that the rules effectively changed the regulatory definition of prior converted cropland without the new definition being subjected to notice and comment requirements.  Accordingly, the court invalidated the Corp’s new rule.

Illinois case.  In Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017), the plaintiff was a developer that obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995.  The local town then passed a zoning ordinance allowing development of the property.  The tract was divided into three sections - 25 acres were to be developed into 168 townhomes; 61 acres to be developed into 169 single-family homes; and 14 acres in between the other acreages to function as a stormwater detention area.  The townhomes and water detention area was to be developed first and then the single-family housing.  Construction of the townhomes began in 1996, and the single-family housing development was about to begin when the defendant designated about 13 acres of the undeveloped property as “wetlands” and asserted regulatory jurisdiction under the CWA.

The defendant claimed jurisdiction on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S.   The plaintiff administratively appealed the defendant’s jurisdictional determination to the Division Engineer who agreed that the District Engineer failed to properly interpret and apply applicable the U.S. Supreme Court decision in Rapanos v. United States, 547 U.S. 715 (2006), which created a significant nexus test.  On reconsideration, the District Engineer issued a second approved jurisdictional determination in 2010 concluding that the tract had a significant nexus to the navigable river.  The plaintiff appealed, but the Division Engineer dismissed the appeal as being without merit.  In 2011, the plaintiff sought reconsideration of the defendant’s appeal decision because of a 1993 prior converted cropland designation that excluded a part of the 100-acres from CWA jurisdiction.  Upon reconsideration, the District Engineer issued a third jurisdictional determination in 2012 affirming its prior determination noting that farming activities had ceased by the fall of 1996 and wetland conditions had returned.  The plaintiff appealed on the basis that the “significant nexus” determination was not supported by evidence.  The Division Engineer agreed and remanded the matter to the District Engineer for supportive documentation and to follow the defendant’s 2008 administrative guidance.  The District Engineer issued a new jurisdictional determination with supportive evidence, including an 11-page document that had previously not been in the administrative record.  This determination, issued in 2013, constituted a final agency determination, from which the plaintiff sought judicial review. 

In court, the plaintiff claimed that the defendant didn’t follow its own regulations, disregarded the instructions of the Division Engineer, and violated the Administrative Procedures Act (APA) by supplementing the record with the 11-page document.  However, the trial court judge (an Obama appointee) noted that existing regulations allowed the Division Engineer, on remand, to instruct the District Engineer to supplement the administrative record on remand and that the limitation on supplementing the administrative record only applied to the Division Engineer.  The trial court also determined that the supplemental information did not violate the Division Engineer’s remand order, and that the supplemental information had been properly included in the administrative record and was part of the basis for the 2013 reviewable final agency determination.  The trial court also upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river.  In addition, the trial court determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned. 

On appeal, in Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 17-3403, 2018 U.S. App. LEXIS 17608 (7th Cir. Jun. 27, 2018), the appellate court three-judge panel in a unanimous opinion (the author of the opinion is a Trump appointee and another judge is also a Trump appointee; the third panel member is a Ford appointee) first noted that the Corps concluded that the tract was a WOTUS based on the 11-page document both “alone and in combination with other wetlands in the area.”  However, the appellate court held that this conclusion lacked substantial evidence.  Simply stating that wetlands filter out pollutants and that the tract has a “discrete and confined intermittent flow” to a creek that flowed to a WOTUS which gave the tract the ability to pass pollutants along was mere speculation that didn’t support a significant nexus with a navigable water.  The appellate court also that the Corps also determined that the development of the tract would result in a floodwater rise of a fraction of one percent. On this point, the court stated, “If the Corps thinks that trivial number significant, it needs to give some explanation as to why.”  The appellate court found similarly with respect to the potential increase on downstream nitrogen.  The Corps provided no reasoning for its conclusion. 

The appellate court also noted that the Corps referenced the National Wetland Inventory for a listing of all of the wetlands in the area that were in proximity to the creek that flowed into a navigable waterway.  But, again, the appellate court scolded the Corps for making a bald assertion that the wetlands in the watershed were adjacent to the same tributary without any supporting evidence.   The Corps claimed it didn’t have to show or explain how each wetland was adjacent to the creek, but the appellate court stated that constituted jurisdictional overreach.  Importantly, the court stated that, “the significant nexus test has limits:  the Corps can consider the effects of in-question wetlands only with the effects of lands that are similarly situated.  To do as the Corps did on this record – to consider the estimated effects of a wide swath of land that dwarfs the in-question wetlands, without first showing or explaining how the land is in fact similarly situated – is to disregard the test’s limits…. By contrast, the Corps’ similarly-situated finding here, lacking as it does record support or explanation, is little more than administrative ipse dixit.”

Consequently, the appellate court vacated the trial court’s grant of summary judgment to the Corps and remanded with instructions to remand to the Corps for reconsideration of its jurisdiction over the tract.

Conclusion

Two ipse dixit determinations by federal agencies against landowners.  In each situation, the appellate court found that the government had abused its discretion.  The cases point out that maybe there is some hope that the courts will hold government agencies to the requirement that they must support their determinations with solid proof.  They can’t just say that it is so because they say it is.

July 2, 2018 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Friday, June 8, 2018

Wind Farm Nuisance Matter Resolved – Buy the Homeowners Out!

Overview

Wind “farms” can present land-use conflict issues for nearby landowners by creating nuisance-related issues associated with turbine noise, eyesore from flicker effects, broken blades, ice-throws, and collapsing towers, for example. 

Courts have a great deal of flexibility in fashioning a remedy to deal with nuisance issues.  A recent order by a public regulatory commission is an illustration of this point.

Wind Farm Nuisance Litigation

Nuisance litigation involving large-scale “wind farms” is in its early stages, but there have been a few important court decisions.  A case decided by the West Virginia Supreme Court in 2007 illustrates the land-use conflict issues that wind-farms can present.  In Burch, et al. v. Nedpower Mount Storm, LLC and Shell Windenergy, Inc., 220 W. Va. 443, 647 S.E.2d 879 (2007), the Court ruled that a proposed wind farm consisting of approximately 200 wind turbines in close proximity to residential property could constitute a nuisance.  Seven homeowners living within a two-mile radius from the location of where the turbines were to be erected sought a permanent injunction against the construction and operation of the wind farm on the grounds that they would be negatively impacted by turbine noise, the eyesore of the flicker effect of the light atop the turbines, potential danger from broken blades, blades throwing ice, collapsing towers and a reduction in their property values.  The court held that even though the state had approved the wind farm, the common-law doctrine of nuisance still applied.  While the court found that the wind-farm was not a nuisance per se, the court noted that the wind-farm could become a nuisance.  As such the plaintiffs’ allegations were sufficient to state a claim permitting the court to enjoin the creation of the wind farm.

In another case involving nuisance-related aspects of large-scale wind farms, the Kansas Supreme Court upheld a county ordinance banning commercial wind farms in the county.  Zimmerman v. Board of County Commissioners, 218 P.3d 400 (Kan. 2009). The court determined that the county had properly followed state statutory procedures in adopting the ordinance, and that the ordinance was reasonable based on the county’s consideration of aesthetics, ecology, flora and fauna of the Flint Hills.  The Court cited the numerous adverse effects of commercial wind farms including damage to the local ecology and the prairie chicken habitat (including breeding grounds, nesting and feeding areas and flight patterns) and the unsightly nature of large wind turbines.  The Court also noted that commercial wind farms have a negative impact on property values, and that agricultural and nature-based tourism would also suffer.

Buy-Out Ordered

A recent settlement order of the Minnesota Public Utilities Commission (Commission)requires a wind energy firm to buy-out two families whose health and lives were materially disaffected by a wind farm complex near Albert Lea, Minnesota.  As a result, it is likely that the homes will be demolished so that the wind farm can proceed unimpeded by local landowners that might object to the operation.  That’s because the order stated that if the homes remained and housed new residents, those residents could not waive the wind energy company’s duty to meet noise standards even if the homeowners were willing to live with violations of the Minnesota Pollution Control Agency’s ambient noise standard in exchange for payment or through some other agreement.

In re Wisconsin Power and Light, Co., No. ET-6657/WS-08-573, Minn. Pub. Util. Commission (Jun. 5, 2018) has a rather lengthy procedural history preceding the Commission’s order.  On October 20, 2009, the Commission issued a large wind energy conversion system site permit to Wisconsin Power and Light Company (WPL) for the approximately 200-megawatt first phase of the Bent Tree Wind Project, located in Freeborn County, Minnesota. The project commenced commercial operation in February 2011. On August 24, 2016, the Commission issued an order requiring noise monitoring and a noise study at the project site. During the period of September 2016 through February 2018 several landowners in the vicinity filed over 20 letters regarding the health effects that they claim were caused by the project. On September 28, 2017, the Department of Commerce Energy Environmental Review Analysis Unit (EERA) filed a post-construction noise assessment report for the project, identifying 10 hours of non-compliance with Minnesota Pollution Control Agency (MPCA) ambient noise standards during the two-week monitoring period.

On February 7, 2018, EERA filed a phase-two post construction noise assessment report concluding that certain project turbines are a significant contributor to the exceedances of MPCA ambient noise standards at certain wind speeds.  The next day, WPL filed a letter informing the Commission that it would respond to the Phase 2 report at a later date and would immediately curtail three turbines that were part of the project, two of which were identified in the phase 2 report. On February 20, 2018, the landowners filed a Motion for Order to Show Cause and for Hearing, requesting that the Commission issue an Order to Show Cause why the site permit for the project should not be revoked, and requested a contested-case hearing on the matter.

On April 19, 2018, WPL filed with the Commission a Notice of Confidential Settlement Agreement and Joint Recommendation and Request, under which WPL entered into a confidential settlement with each landowner, by which the parties agreed to the terms of sale of their properties to WPL, execution of easements on the property, and release of all the landowners’ claims against WPL. The agreement also outlined the terms by which the agreement would be executed. The finality of the agreement was conditioned upon the Commission making specific findings on which the parties and the Department agreed. These findings include, among others: dismissal of the landowners’ February 2018 motion and all other noise-related complaints filed in this matter; termination of the required curtailment of turbines; transfer of possession of each property to WPL; and a requirement that compliance filing be filed with commission. The Commission determined that resolving the dispute and the terms of the agreement were in the public interest and would result in a reasonable and prudent resolution of the issues raised in the landowner’s complaints. Therefore, the Commission approved the agreement with the additional requirement that upon the sale of either of the landowners’ property, WPL shall file with the Commission notification of the sale and indicate whether the property will be used as a residence. If the property is intended to be used as a residence after sale or upon lease, the permittee must file with the Commission several things - notification of sale or lease; documentation of present compliance with noise standards of turbines; documentation of any written notice to the potential residence of past noise studies alleging noise standards exceedances, and if applicable, allegations of present noise standards exceedances related to the property; and any mitigation plans or other relevant information. 

Conclusion

The order issued in the Minnesota matter is not entirely unique.  Several decades ago, the Arizona Supreme Court ordered a real estate developer to pay the cost of a cattle feedlot to move their feeding operations further away from the area where the developer was expanding into.   Spur Industries, Inc. v. Del E. Webb Development Co., 108 Ariz. 178, 494 P.2d 700 (1972).

However, the bottom-line is that the matter in Minnesota is an illustration of what can happen to a rural area when a wind energy company initiates development in the community.

June 8, 2018 in Civil Liabilities, Regulatory Law | Permalink | Comments (0)

Monday, June 4, 2018

Are Mandatory Assessments For Generic Advertising of Ag Commodities Constitutional?

Overview

Federal law regulates the handling of agricultural commodities in commerce by establishing marketing orders with the purpose of insuring that consumers receive an adequate supply of a commodity at a stable price.  Marketing orders have long been used in the fruit, nut, vegetable and milk industries and typically require that a handler (dealer) pay a fixed minimum price to the producer of a commodity.  In addition, the marketing of a commodity must follow a system of rules. 

Separate legislation has established mandatory assessments for promotion of particular agricultural products.  An assessment (or “check-off”) is typically levied on handlers or producers of commodities with the collected funds to be used to support research promotion and information concerning the product.  Such check-off programs have been challenged on First Amendment free-speech grounds. Indeed, a recent case from California involved a mandatory assessment for the generic marketing of grapes.  A group of grape producers that believed they produced high quality grapes objected to being required to pay for the advertising of grapes in general. 

Mandatory assessments for generic advertising of ag commodities – that’s the focus of today’s post.

Caselaw

In United States v. United Foods, Inc., 533 U.S. 405 (2001), the U.S. Supreme Court held that mandatory assessments for mushroom promotion under the Mushroom Promotion, Research, and Consumer Identification Act violated the First Amendment.  The assessments were directed into generic advertising, and some handlers objected to the ideas being advertised.  In an earlier decision, Glickman v. Wileman Brothers & Elliott, Inc., 521 U.S. 457 (1997), the Court had upheld a marketing order that was part of a greater regulatory scheme with respect to California tree fruits.  In that case, producers were compelled to contribute funds for cooperative advertising and were required to market their products according to cooperative rules.  In addition, the marketing orders had received an antitrust exemption.  None of those facts was present in the United Foods case, where the producers were entirely free to make their own marketing decisions and the assessments were not tied to a marketing order. The Supreme Court did not address, however, whether the check-offs at issue were government speech and, therefore, not subject to challenge as an unconstitutional proscription of private speech.

The government speech issue was before the court in 2005.  In Johanns v. Livestock Marketing Association, 544 U.S. 550 (2005), the Supreme Court upheld the beef check-off as government speech. Under the Beef Checkoff, a $1.00/head fee is imposed at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board.

The case involved (in the majority’s view) a narrow facial attack on whether the statutory language of the legislation authorizing the beef check-off created an advertising program that could be classified as government speech. That was the only issue before the Court.  At the time, the government speech doctrine was relatively new not well-developed but, prior Supreme Court opinions not involving agricultural commodity check-offs indicated that to constitute government speech, a check-off must clear three hurdles - (1) the government must exercise sufficient control over the content of the check-off to be deemed ultimately responsible for the message; (2) the source of the check-off assessments must come from a large, non-discrete group; and (3) the central purpose of the check-off must be identified as the government’s.

Based on that analysis, it was believed that the beef check-off would clear only the first and (perhaps) the third hurdle, but that the program would fail to clear the second hurdle. Indeed, the source of funding for the beef check-off comes from a discrete identifiable source (cattle producers) rather than a large, non-discrete group. The point is that if the government can compel a targeted group of individuals to fund speech with which they do not agree, greater care is required to ensure political accountability as a democratic check against the compelled speech. That is less of a concern if the funding source is the taxpaying public which has access to the ballot box as a means of neutralizing the government program at issue and/or the politicians in support of the program. While the dissent focused on this point, arguing that the Act does not establish sufficient democratic checks, Justice Scalia, writing for the majority, opined that the compelled-subsidy analysis is unaffected by whether the funds for the promotions are raised by general taxes or through a targeted assessment. That effectively eliminates the second prong of the government speech test. The Court held that the other two requirements were satisfied in as much as the legislation vested substantial control over the administration of the check-off and the content of the ads in the Secretary.

The court did not address (indeed, the issue was not before the court) whether the advertisements, most of which are credited to “America’s Beef Producers,” give the impression that the objecting cattlemen (or their organizations) endorse the message. Because the case only involved a facial challenge to the statutory language of the Act, the majority examined only the Act’s language and concluded that neither the statute nor the accompanying Order required attribution of the ads to “America’s Beef Producers” or to anyone else. Thus, neither the statute nor the Order could be facially invalid on this theory. However, the Court noted that the record did not contain evidence from which the Court could determine whether the actual application of the check-off program resulted in the message of the ads being associated with the plaintiffs. Indeed, Justice Thomas, in his concurring opinion, noted that the government may not associate individuals or organizations involuntarily with speech by attributing an unwanted message to them whether or not those individuals fund the speech and whether or not the message is under the government’s control.

After the Supreme Court’s decision in the beef-checkoff case, the U.S. Circuit Court of Appeals for the Ninth Circuit decided a case involving the California Pistachio check-off. Paramount Land Company, LP v. California Pistachio Commission, 491 F.3d 1003 (9th Cir. 2007).  The court determined that the First Amendment was not implicated because, consistent with Johanns, the Secretary of the California Department of Food and Agriculture retained sufficient authority to control both the activities and the message under the Pistachio Act.  The court reasoned that the fact that the Secretary had not actually played an active role in controlling pistachio advertising could not be equated with the Secretary abdicating his regulatory role.

In another California case, a court held that milk producer assessments used for generic advertising to stimulate milk sales were constitutional under the Johanns rationale.  Gallo Cattle Co. v. A.G. Kawamura, 159 Cal. App. 4th 948, 72 Cal. Rptr. 3d 1 (2008).

In more recent litigation, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Vilsack, No. CV-16-41-GF-BMM-JTL, D. Mont. Dec. 12, 2016), the plaintiff (cattle producers) claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was constitutionally defective. The court, as part of the findings and recommendations of a U.S. Magistrate Judge, determined that the plaintiff had standing and had stated a claim upon which relief could be granted.  The cattle producers claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The cattle producers objected to being forced to fund a generic message that “beef is beef” regardless of where the cattle from which the beef was derived or born.  That message, the cattle producers claimed, was contrary to their interests of capitalizing on marketing their superior beef products produced from cattle produced in the United States.

The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision were finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff.  Upon further review, the federal trial court upheld the preliminary injunction.  Ranchers- Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, No. CV 16-41-GF-BMM, 2017 U.S. Dist. LEXIS 95861 (D. Mont. Jun. 21, 2017).  

On further review, the U.S. Court of Appeals for the Ninth Circuit affirmed.  Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, 718 Fed. Appx. 541 (9th Cir. 2018)The Ninth Circuit determined that the trial court had properly evaluated the beef-checkoff under the standards set forth in Johanns and Paramount.  

Recent Case

In Delano Farms Company v. California Table Grape Commission, No. S226538, 2018 Cal. LEXIS 3634 (Cal. Sup. Ct. May 24, 2018), the plaintiffs were several California grape growers.  They claimed that the defendant violated the plaintiffs’ First Amendment free speech rights by collecting mandated fees to pay for a range of services including advertising and marketing. Specifically, the plaintiffs claimed the collection of assessments by the defendant under the California Ketchum Act subsidized promotional speech on behalf of California table grapes as a generic category that violated their rights to free speech, free association, due process, liberty and privacy under the California Constitution (Article I, Section 2).  They took this position because the claimed to have developed specialty grapes that they wanted to market in their own manner without also being forced to pay for generic grape advertising that sponsored a viewpoint that they disagreed with.

The trial court ruled that the defendant was a governmental entity, and therefore its speech was government speech that could be funded by assessments collected from the plaintiffs under a constitutional analysis that is significantly deferential and is not subject to heightened scrutiny. As such, the trial court determined that the speech did not implicate Article 1, Section 2.

On appeal, the California Supreme Court affirmed. The Court noted that the relevant circumstances established sufficient government responsibility for and control over the messaging at issue such that the advertising constituted government speech that the plaintiffs could be required to subsidize without any implication of their constitutional rights under Article 1, Section 2. Specifically, the Court noted that the California legislature developed and endorsed the central message that the defendant promulgated with respect to California fresh grapes generically. The articulation and broadcasting of that message was entrusted to market participants acting through the defendant. The Court viewed this as meaningful oversight by the public and other governmental actors and included oversight mechanisms serving to ensure that the defendant’s messaging remained within the statutory parameters. The Court also stated that there is no right not to fund government speech, and also determined that the Ketchum Act did not bar the plaintiffs from speaking. 

Conclusion

Mandatory assessments for generic advertising for ag commodities is understandably frustrating for some producers.  However, the U.S. Supreme Court has provided a measuring stick for evaluating the constitutionality of such programs.  If the administration of the particular check-off  is substantially controlled by the government, and the government controls the contents of the ads at issue, the assessments are likely to be upheld as government speech. 

June 4, 2018 in Regulatory Law | Permalink | Comments (0)

Monday, April 9, 2018

Non-Tax Ag Provisions in the Omnibus Bill

Overview

In late March, the Congress passed, and the President signed, the Consolidated Appropriations Act of 2018, H.R. 1625.  This 2,232-page Omnibus spending bill, which establishes $1.3 trillion of government spending for fiscal year 2018, contains several ag-related provisions.  I looked at one of those a couple of weeks ago – the modification to I.R.C. §199A that was included in the Tax Cuts and Jobs Act (TCJA) enacted last December and which became effective for tax years after 2017.  I.R.C. §199A, known as the qualified business income (QBI) deduction, created a 20 percent deduction for sole proprietorships and pass-through businesses.  However, the provision created a tax advantage for sellers of agricultural products sold to agricultural cooperatives.  Before the modification, those sales generated a tax deduction from gross sales for the seller.  But if those same ag goods were sold to a company that was not an agricultural cooperative, the deduction could only be taken from net business income.  That tax advantage for sales to cooperatives was deemed to be a drafting error and was modified by a provision that provides greater equity between sales to agricultural cooperatives and non-cooperatives. 

The modification to I.R.C. §199A received a lot of attention.  However, there were a couple of other provisions in the Omnibus bill that are also ag-related.  Today’s blog post examines those other two provisions. 

Animal Waste Air Reporting Exemption For Farms

Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule. Various environmental groups challenged the exemption on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the retained reporting requirement for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but did determine that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, No. 09-1017, 2017 U.S. App. LEXIS 6174 (D.C. Cir. Apr. 11, 2017).

The court’s order potentially subjected almost 50,000 farms to the additional reporting requirement. As such, the court delayed enforcement of its ruling by issuing multiple stays, giving the EPA additional time to write a new rule. The EPA issued interim guidance on October 25, 2017. The court issued its most recent stay in the matter on February 1, 2018, with the expiration scheduled for May 1. However, Division S, Title XI, Section 1102 of the Omnibus bill, entitled the Fair Agricultural Reporting Method Act (FARM Act), modifies 42 U.S.C. §9603 to include the EPA exemption for farms that have animal waste air releases. Specifically, 42 U.S.C. §9603(e) is modified to specify that “air emissions from animal waste (including decomposing animal waste) at a farm” are exempt from the CERCLA Sec. 103 notice and reporting requirements. “Animal waste” is defined to mean “feces, urine, or other excrement, digestive emission, urea, or similar substances emitted by animals (including any form of livestock, poultry, or fish). The term animal waste “includes animal waste that is mixed or commingled with bedding, compost, feed, soil or any other material typically found with such waste.” A “farm” is defined as a site or area (including associated structures) that is used for “the production of a crop; or the raising or selling of animals (including any form of livestock, poultry or fish); and under normal conditions, produces during a farm year any agricultural products with a total value equal to not less than $1,000.”

ELD Rule Involving Agricultural Commodities Defunded

The Omnibus bill also addresses an Obama-era regulation involving truckers that is of particular importance to the livestock industry.  On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule was issued in late 2015. The new rule would require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18, 2017. The devices connect to the vehicle's engine and automatically record driving hours. There are numerous exceptions to the ELD final rule.

While the mandate was set to go into effect December 18, 2017, the Federal Motor Carrier Safety Administration (FMCSA) granted a 90-day waiver for all vehicles carrying agricultural commodities. That 90-day delay was later extended. Other general exceptions to the final rule exist for vehicles built before 2000; vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)); drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)); and drivers who maintain HOS logs for no more than eight days during any 30-day period.

Under the Omnibus legislation, the ELD rule was defunded through the end of the government's current fiscal year - September 30, 2018. Under Division L, Title I, Section 132, specifies that, “None of the funds appropriated or otherwise made available to the Department of Transportation by this Act or any other Act may be obligated or expended to implement, administer, or enforce the requirements of 5 section 31137 of title 49, United States Code, or any regulation issued by the Secretary pursuant to such section, with respect to the use of electronic logging devices by operators of commercial motor vehicles, as defined in section 31132(1) of such title, transporting livestock as defined in section 602 of the Emergency Livestock Feed Assistance Act of 1988 (7 U.S.C. 1471) or insects.” 

Conclusion

The Omnibus bill is a conglomeration of many provisions, most of which don’t have a direct impact on agricultural producers or agribusinesses.  However, there were a few provisions included of importance to agriculture.  While very few people, if any, have read and understand all of the provisions in the 2,232-page bill, it is important for those in the agricultural industry to have an understanding of the provisions that apply to them.

April 9, 2018 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Thursday, April 5, 2018

Federal Crop Insurance - Some Recent Case Developments

Overview

When the Congress eventually gets around to debating the next Farm Bill, I suspect that crop insurance will comprise a significant part of the discussion.  In certain parts of the country in recent years, crop insurance comprised the largest portion of farm income.  Given that one of those areas, Kansas, is represented in the Senate by the chair of the Senate Ag Committee, that practically guarantees that crop insurance will get plenty of attention by the politicians during the Farm Bill debate. 

The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the fledgling crop insurance program.  That program was basically an experimental one until the Congress passed the Federal Crop Insurance Act (FCIA) of 1980.  Changes were made to the crop insurance program on multiple occasions and, in 1994, the program underwent a major overhaul with the Federal Crop Insurance Reform Act of 1994 which made it mandatory for farmers to participate in the program to qualify for various federal farm program benefits. 

With the 1996 Farm bill, the mandatory participation in crop insurance was repealed, so to speak.  However, if a farmer received other farm program benefits the farmer had to buy crop insurance for the crop year or waive eligibility for disaster benefits for that year.  In addition, the Risk Management Agency (RMA) was also created in 1996 as a part of the United States Department of Agriculture (USDA).  The RMA administers the FCIC programs and other risk management programs in conjunction with private sector entities to develop insurance products for farmers. 

In recent months, the courts have decided numerous cases involving crop insurance.  In today’s post, I take a look at three of them.  Each of them involves unique issues.

RMA and Freedom of Information Act (FOIA) Requests

In Bush v. United States Department of Agriculture, No. 16-CV-4128-CJW, 2017 U.S. Dist. LEXIS 131381 (N.D. Iowa Aug. 17, 2017), the RMA pursuant to the FOIA. The plaintiff was seeking the disclosure of soybean and corn yield within four townships in Cherokee County, Iowa. The RMA provided a no records in response to the plaintiff’s request explaining that it did not have the information available by section for townships within a county. The court determined that the purpose of the FOIA is to give the public greater access to governmental records. However, there are exceptions to this rule. The court determined that summary judgment for an agency is appropriate when the agency shows that it made a good faith effort to conduct a search for the requested records, using methods which can reasonably be expected to produce the information requested. However, the agency does not have to search every record system. In addition, the court pointed out that the FOIA neither requires an agency to answer questions disguised as FOIA requests or to create documents or opinions in response to an individual’s request for information.

The court concluded that the evidence illustrated that RMA did not maintain records matching the description of the plaintiff’s requests. Although it did collect some information from the records of insurance companies which would contain some of the information the plaintiff sought, it did not maintain records containing the precise information requested. As a result, the RMA was not required to provide information that it did not have to the plaintiff, and the court granted RMA’s motion for summary judgment. 

Actual Production History

In Ausmus v. Perdue, No. 16-cv-01984-RBJ, 2017 U.S. Dist. LEXIS 169305 (D. Colo. Oct. 13, 2017), the plaintiffs, farmers who produce winter what in Baca County, Colorado, sought judicial review of an adverse decision of the RMA which was subsequently affirmed by the National Appeals Division (NAD). Section 11009 of the 2014 Farm Bill amended subparagraph 1508(g)(4)(C) of the FCIA to add an APH Yield Exclusion to give crop producers the opportunity to exclude uncharacteristically bad crop years from the RMA’s calculation of how much crop insurance coverage they are entitled to. The plaintiffs wished to insure their 2015 winter wheat crop. Believing that they were eligible to invoke the APH Yield Exclusion, they gave their crop insurance agents letters electing to exclude all eligible crop years for purposes of calculating their coverage. After receiving the letters from the plaintiff and other crop producers, crop insurance providers contacted the RMA requesting guidance on how to handle the APH Yield Exclusion elections concerning the 2015 winter wheat crop. The RMA informed insurance providers that it had authorized the APH Yield exclusion for most crops for 2015, but it did not authorize the APH Yield Exclusion for winter wheat. As a result, the Agency directed insurance providers to deny winter wheat producers’ requests for the APH Yield Exclusion.

The plaintiffs challenged the directive as an adverse decision appealable to NAD. A NAD Hearing Officer conducted a hearing and issued a determination that NAD did not have jurisdiction over the matter and did not reach the merits. The plaintiffs then requested NAD Director Review of the Hearing Officer’s Determination pursuant to 7 C.F.R. § 11.9. The NAD Director reversed the Hearing Officer’s determination as to jurisdiction, but also held that the RMA has discretion to determine the appropriate time to implement the APH Yield Exclusion with regard to 2015 winter wheat. This decision effectively affirmed the RMA’s decision not to authorize the APH Yield exclusion. The plaintiffs appealed, and the trial court determined that, absent clear direction by Congress to the contrary, a law takes effect on the date of its enactment. The court noted that there was no statutory indication that it would take effect other than on the date of its enactment. The court viewed Congress’ silence as an expression that it meant the APH Yield Exclusion to be immediately available to producers on the date the Farm Bill was signed into law. Consequently, the court reversed the NAD Director’s decision and remanded this case for the proper application of the APH Yield Exclusion. 

Criminal Investigations

In POCO, L.L.C. v. Farmers Crop Ins. All., Inc., No. 16-35310, 2017 U.S. App. LEXIS 20853 (9th Cir. Oct. 23, 2017), the defendant was a federal crop insurer and the plaintiff was a farming operation that raised potatoes and onions. The plaintiff claimed that it purchased a federal crop insurance policy from the defendant and tendered an insurance claim to the defendant in 2004. The defendant denied the claim and the plaintiff demanded arbitration. The arbitrator found for the plaintiff, requiring the defendant to pay $1,454,450 plus interest on the claim. The defendant appealed the arbitrator’s award, but the trial court affirmed the award for the plaintiff. While the claim was in dispute the USDA was, unbeknownst to the plaintiff, conducting a criminal investigation of the plaintiff for an alleged scheme to profit from the filing of false federal crop insurance claims. Ultimately, the plaintiff and its principal were indicted based on their acceptance of the arbitration award which the government claimed constituted a criminal act. At the subsequent trial, the court dismissed all of the counts with prejudice.

The plaintiff had also sued the defendant for breach of contract, negligent misrepresentation, and violation of the Washington Consumer Protection Act (WCPA). The plaintiff claimed that the defendant had acted as the USDA’s agent and, as a result, the arbitration award was simply a ruse to entrap the plaintiff. The plaintiff claimed that if it had known about the criminal investigation that it could have required the USDA’s direct involvement in the arbitration process and be assured that no criminal charges were pending.  The plaintiff also claimed that USDA's direct involvement would have allowed it to get a court order that the plaintiff had a right to recover on its claims. The trial court granted summary judgment for the defendant holding that a private insurance company has no authority to bind the federal government from pursuing a criminal prosecution, absent involvement from a party with the requisite authority. The trial court ruled that it was unreasonable as a matter of law for a settlement agreement between private parties which clearly defines the subject matter of the agreement, to preclude criminal prosecution by the government. The plaintiff appealed.

The Mutual Release in the parties’ contract provided that the defendant, “for itself and for its insurance companies, and related companies” releases the plaintiff from liability for claims arising out of the plaintiff’s claim for indemnity under the 2003 crop insurance policies issued by the defendant. The plaintiff argued that “its insurance companies” included the Federal Crop Insurance Company and, therefore, the federal government. However, the appellate court held that the phrase could not reasonably be interpreted to bind the federal government and prevent the Department of Justice from pursing a criminal prosecution against the plaintiff for events related to the 2003 policies. Furthermore, the limited scope of the release could not be reasonably read to encompass the criminal charges filed against the plaintiff, which dealt with inflating crop baseline prices to increase eventual payouts on numerous insurance policies. Thus, the appellate court affirmed the trial court’s grant of summary judgment on the breach of contract claim. The plaintiff also alleged misrepresentation of a material fact. The appellate court determined, however, that the plaintiff failed to demonstrate a genuine factual dispute as to whether the defendant knew that the plaintiff was under a criminal investigation. The plaintiff’s evidence in support of that proposition stemmed from a 2004 insurance policy, rather than the 2003 insurance policy at issue in this case.

Consequently, the appellate court agreed with the trial court that, as a matter of law, the plaintiff could not have reasonably relied on the purported misrepresentation. Therefore, the trial court’s grant of summary judgment on the plaintiff’s misrepresentation claim was granted. Finally, the plaintiff’s WCPA claim failed because there was no misrepresentation, deception or unfairness. The terms of the contract were not deceptive and the plaintiff did not make a showing that there was a genuine dispute over whether the defendant knew about the criminal investigation. 

Conclusion

These cases are just three of those that have been recently decided by the federal courts involving crop insurance.  Crop insurance is important, but it is imperative to follow the rules.  Because those rules are often complex and difficult to understand, it is important for a farmer to have competent legal counsel to provide guidance through the issues.

April 5, 2018 in Regulatory Law | Permalink | Comments (0)

Monday, March 12, 2018

Trade Issues and Tariffs – Are Agriculture’s Concerns Legitimate?

Overview

Since the enactment of the Tariff Act of 1789 (signed by President Washington) along with the Collection Act also enacted on the same day, the U.S. has been engaged in protecting trade.  Those two 1789 laws were not only designed to protect trade.  They were also enacted with the purpose of raising revenue for the federal government. As the soon-to-be first Secretary of the Treasury, Alexander Hamilton took the position that tariffs would encourage industry in the newly-formed country and pointed out that other countries subsidized their industries and that tariffs would protect U.S. businesses from the negative impacts of those subsidies.  Later on, the Tariff Act of 1816 addressed concerns about other countries “dumping” their goods in the U.S. at less than fair value to damage U.S. domestic production. 

This history points out that the federal government has imposed tariffs practically from the founding of the country.  Presently, massive trade deficits with various countries (particularly Mexico and China) and currency manipulation (by China) have posed a serious problem that a pragmatic President is determined to solve.

But, what are the potential implications of the Trump Administration’s recent trade measures on agriculture?  Are the recently announced tariffs part of a bigger overall picture?  Are they a bargaining chip in negotiating improvements to existing trade deals?  These are all important questions.

For today’s post, I have asked Prof. Amy Deen Westbrook, the Kurt M. Sager Memorial Distinguished Professor of International and Commercial Law at Washburn University School of Law, for her thoughts on the matter.  She graciously accepted my invitation and is today’s guest blogger.  As you will see, Prof. Westbrook is another example of the fine legal instruction that is provided at Washburn Law.  I will sum things up in the conclusion at the end.

Multiple Moving Parts – Trade Deals and Tariffs

Renegotiation of NAFTA.  Fulfilling one of President Trump’s campaign promises, the Administration launched a renegotiation process of the North American Free Trade Agreement (NAFTA) last August.  The United States is seeking a more favorable deal, and has threatened to withdraw from NAFTA if it cannot come to a satisfactory arrangement with Mexico and Canada. 

U.S. NAFTA negotiating priorities center on increased minimum regional content requirement for autos to qualify for NAFTA treatment, access to U.S. government procurement opportunities, revised dispute resolution options, an automatic five-year sunset provision for NAFTA, and more advantageous agriculture provisions.  In particular, the United States has requested that Canada dismantle its system of tariffs and quotas in the dairy sector.  The United States is also seeking authorization for stronger protections for seasonal U.S. produce against Mexican imports. 

U.S. agricultural demands reflect the current NAFTA agricultural trade deficit.  Although the deficit largely results from the weaker Mexican and Canadian currencies, it also reflects the increasing volume of imports of fruits and vegetables into the United States, particularly counter-seasonal imports of products like tomatoes, peppers and asparagus from Mexico. 

Note:  Negotiators from all three NAFTA parties wrapped up their seventh round of talks in early March of 2018 in Mexico City, and anticipate an eighth round in Washington, D.C. beginning in April.  However, it is unclear when, or even if, a revised agreement will be ironed out.

Use of trade remedies against U.S. trading partners.  The Trump Administration has various remedies at its disposal with respect to trade disputes.  Recently, for example, the Trump Administration has imposed several different measures on foreign imports.  U.S. law, the World Trade Organization (WTO) agreement, and other international obligations provide the United States with an array of remedies to protect U.S. producers from trade practices by other countries.  As noted below, the Administration has utilized each of these remedies to-date. 

    Dumping, subsidies, and other unfair trade practicesIn response to a petition by or on behalf of a U.S. industry, U.S. trade regulators can levy anti-dumping duties on foreign goods sold in the United States at unfairly low prices if the sale of those goods materially injures, or threatens to injure, or even retards the establishment of, the domestic industry.  Similarly, "countervailing duties" may be levied on foreign goods sold in the United States at unfairly low prices as a result of an impermissible subsidy by the exporting nation.  The United States currently has 164 antidumping and countervailing duty orders in effect for steel alone, with another 20 in the pipeline.

    Section 301.  Section 301 of the Trade Act of 1974 empowers the U.S. Trade Representative (USTR) to impose duties or suspend concessions against a foreign country that takes actions that are unjustifiable, unreasonable or discriminatory and burden or restrict U.S. commerce.  In 2017, the United States launched a Section 301 investigation into Chinese practices relating to forced technology transfer, unfair licensing and other intellectual property policies.

    Section 201.  In addition to remedies for unfair trade practices, the United States can also impose protections for domestic industries against fair trade practices by our trade partners.  On January 22, 2018, President Trump approved the imposition of safeguards under Section 201 of the Trade Act of 1974 against foreign solar panels and washing machines.  Section 201 relief, which was last granted by the United States 16 years ago, provides temporary protection to a U.S. industry that is being injured by a surge of foreign imports.  The measures are intended to last for a couple of years, and in fact the U.S. plan for solar panels is to start tariffs at 30% and let them gradually fall to 15% over four years.

    Section 232.  Perhaps more significant, at least to the financial markets, than the anti-dumping, anti-subsidy, Section 301 or Section 201 actions, however, was the announcement in early March of 2018 that the U.S. would take measures under Section 232 of the Trade Expansion Act of 1962.  An almost-never-used provision, Section 232 enables the President to restrict foreign trade in the interests of national security.  In April of 2017, President Trump requested the Secretary of Commerce to review the impact of imported steel and aluminum under Section 232.  The Department of Commerce produced its reports in January of 2018, and made them public in February.  Unlike the last time the Administration considered Section 232 measures with respect to steel (in 2001), this time the Department of Commerce recommended tariffs be imposed on foreign imports in order to safeguard national security.  Upon receipt of the report, the President had 90 days to decide whether to impose measures.  On March 8, the President imposed “flexible,” global tariffs (25 percent on steel and 10 percent on aluminum). It is important to note that the President announced the tariffs in the middle of the NAFTA negotiations.   

Note:  The Section 232 measures have resulted in substantial diplomacy and lobbying by U.S. industries that will be directly affected by the Section 232 measures - such as the auto industry.  U.S. industries indirectly affected by the measures, such as agriculture, have also voiced concern, as have U.S. foreign trading partners. 

The Section 232 tariffs are seen largely as a measure against China.  The United States is the world’s top steel importer.  China is the world’s largest producer of both steel and aluminum.  Although China accounts for just a fraction of U.S. steel imports, the United States believes that China has flooded the global market for steel and is dragging down prices as a result.  In addition, Canada (the largest U.S. source of foreign steel and aluminum) and Mexico (the fourth largest U.S. source of foreign steel and 11th largest aluminum source) are currently exempted from the tariffs, contingent upon successful completion of the NAFTA negotiations.  President Trump has also indicated that Australia may be exempted (by virtue of a pending security agreement) and the USTR met in early March of 2018 with representatives of the European Union and Japan about the possibility of exclusion from the tariffs. 

Normally, Section 232 tariffs take effect 15 days after the President’s official announcement.  That means that right now, and over the next few days, negotiations could occur with a number of U.S. trading partners as they argue for exemptions.  The negotiations may be made more dramatic by the fact that the Administration has pledged to block a certain volume of foreign steel from the market, meaning that each time a country is exempted from the tariffs, tariffs presumably must rise on the remaining/non-exempted countries.

Foreign Reactions To The Tariffs – Including Agricultural Impacts

U.S. Secretary of Agriculture Sonny Perdue has expressed concern that U.S. trading partners impacted by the U.S. trade measures, particularly the steel tariffs, will retaliate against U.S. agricultural exports.  As expected, foreign reactions to the U.S. measures have not been positive.  The European Union (EU) announced a list of $3.5 billion of U.S. products against which it will impose 25% retaliatory tariffs if the U.S. imposes the steel and aluminum measures on the EU.  The EU list targeted Harley Davidson motorcycles, jeans, and bourbon, as well as orange juice, corn, cranberries, peanut butter and a variety of other agricultural products.  The EU’s announcement echoes its reaction to U.S. Section 201 safeguard measures for steel in 2002, which the EU ultimately successfully challenged at the WTO, resulting in the U.S. removal of the measures before the EU retaliated. 

China has also reacted negatively to the Administration's announcement of new U.S. measures.  On February 4, 2018 (two weeks after the Section 201 measures on solar panels and washing machines were announced). China announced that it would launch anti-dumping and anti-subsidy investigations of U.S. sorghum exports.  U.S. grain sorghum exports to China have increased since 2013, and China currently accounts for approximately 80 percent of U.S. grain sorghum exports.  

In addition, on February 7, 2018, Chinese agricultural producers met to study the possibility of launching anti-dumping or anti-subsidy investigations into U.S. exports of soybeans.  U.S. soybean exports are particularly vulnerable to Chinese measures.  The 30 million tons of soybeans China purchases from the United States represent a third of U.S. production, and make China the largest market for U.S. soybeans.  With Brazilian (and, to a lesser extent, Argentinian) beans in plentiful, and relatively cheap, supply, there is concern that China could curb U.S. imports and replace them with South American soybeans (at least for 6-7 months).  Other concerns center on U.S. beef exports to China, which restarted only last year after a ban imposed in 2003 because of concerns over bovine spongiform encephalopathy.  

The WTO and Other Legal Actions

China, the EU, Japan and South Korea sought consultations with the United States at the WTO following the U.S. imposition of the Section 201 measures against solar panels and washing machines.  Canada also sought an injunction against the imposition of the Section 201 safeguards, but its request was rejected by the U.S. Court of International Trade on March 6, 2018.

However, it is unclear whether U.S. trading partners will challenge the Section 232 national security safeguards at the WTO.  The EU is reported to be considering a WTO challenge, pending the outcome of its request for an exemption from the Section 232 tariffs.  The WTO agreement includes an exception from members’ trade obligations for actions necessary for the protection of a member’s essential security interests.  However, key terms such as “necessary” and “essential security interests” are undefined.  Countries are reluctant to use and even more reluctant to second-guess their trading partners’ use of the exception for essential security interests.  Sovereign countries generally do not want to infringe on the national-security-based policy decisions of other sovereign countries.  In addition, there has been a tacit recognition that if the exception is indiscriminately invoked, it has the potential to undermine the entire WTO system.  If anything can be an essential security interest, then any country can use the exception at anytime. 

Conclusion

Currency manipulation, trade deficits, unfair trade practices, theft and misuse of intellectual property rights, and related issues are not problems that are unique to a particular political party or political ideology.  They are American problems that threaten the financial stability of the U.S. and the production of U.S. products and commodities.  The open borders trade agenda for at least the past 25 years has negatively impacted U.S. families.  For example, just from 2000-2010 (post-NAFTA) the U.S. lost 55,000 factories and 6,000,000 manufacturing jobs across numerous sectors, U.S. wages stagnated, and the associated ingenuity was lost.  These are problems that President Trump has identified that need to be fixed in a pragmatic way.  These are also problems that hit at the core of the United States as a country – as President Washington identified over 200 years ago.

Should the agricultural industry be concerned?  Of course.  However, there is a significant chance that the potential for tariffs and other sanctions on other countries is part of an overall attempt to renegotiate existing trade deals for the benefit of America, including agriculture

March 12, 2018 in Regulatory Law | Permalink | Comments (0)

Tuesday, January 9, 2018

Is There a Constitutional Way To Protect Animal Ag Facilities?

Overview

In response to attempts by activist groups opposed to animal agriculture, legislatures in several states have enacted laws designed to protect specified livestock facilities from certain types of interference.  Some of the laws have been challenged on free speech and equal protection grounds with a few courts issuing opinions that have largely found the laws constitutional suspect.  However, last week’s opinion by the U.S. Court of Appeals for the Ninth Circuit construing the Idaho provision provides a roadmap for lawmakers to follow when crafting similar statutes to protect livestock facilities that will survive constitutional scrutiny.

I asked my research assistant, Washburn law student Melissa Miller, to dig into the Ninth Circuit’s opinion for me so that I could wrap her insight from that case into a broader piece for today’s post.  Today’s post includes some of her thoughts.

General Statutory Construct

The basic idea of state legislatures that have attempted to provide a level of protection to livestock facilities is to bar access to an animal production facility under false pretenses.  At their core, the laws attempt to prohibit a person having the intent to harm a livestock production facility from gaining access to the facility (such as via employment) to then commit illegal acts on the premises.  See, e.g., Iowa Code §717A.3A. (a legal challenge to the Iowa law was filed in late 2017).  Laws that bar lying and trespass coupled with the intent to do physical harm to an animal production facility likely are not constitutionally deficient.  Laws that go beyond those confines may be. 

Recent Court Opinions

Recently, a challenge to the North Carolina statutory provision was dismissed for lack of standing.  The plaintiffs in the case, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a North Carolina employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act unconstitutionally stifled their ability to investigate North Carolina employers for illegal or unethical conduct and restricted the flow of information those investigations provide.  The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).

The Utah law, however, was deemed unconstitutional.  At issue was Utah Code §76-6-112 (Act) which criminalizes the entering of a private agricultural livestock facility under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility.  Anti-livestock activist groups sued on behalf of the citizen-activist claiming that the Act amounted to an unconstitutional restriction on speech in violation of the First Amendment. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist.”  For those reasons, the court determined that the Act was unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017).

A Wyoming law experienced a similar fate.  In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" included numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection of resource data. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016).

The Idaho Statute and the Courts

In 2012, an animal rights activist went undercover to get a job at an Idaho dairy farm then secretly filmed ongoing animal abuse there. The video was then given to Mercy for Animals, an animal rights group, that publicly released portions of the video, drawing national attention. The dairy farm owner responded to the video by firing the employees who were caught on camera, instituting operational protocols, and conducting an animal welfare audit at the farm. Following the release of the video, the Idaho Legislature responded by enacting the Interference with Agricultural Production Law, Idaho Code § 18-7042. The legislation broadly criminalizes making misrepresentations to access an agricultural production facility as well as making audio and video recordings of the facility without the owner’s consent. Specifically, Idaho Code Sec. 18-7042(1)(d)) criminalizes "interference with agricultural production" when a person knowingly enters an ag production facility without permission or without a court order or without otherwise having the right to do so by statute (in other words, the person is on the premises illegally), and makes a video or audio recording of how the ag operation is conducted.

In March of 2014, The Animal League Defense Fund (ALDF) sued challenging the constitutionality of the law. The complaint alleged that the purpose and effect of the statute “are to stifle political debate about modern agriculture by criminalizing all employment-based undercover investigations and criminalizing investigative journalism, whistleblowing by employees, or other expository efforts that entail images or sounds” in violation of the First and Fourteenth Amendments. The district court determined that four subsections of the statute—§18-7042(1)(a)-(d)—were unconstitutional on First Amendment and Equal Protection Grounds.

On appeal, the Ninth Circuit partially reversed parts of the trial court’s ruling, thereby upholding parts of the law. Animal Legal Defense Fund v. Wasden, No. 15-35960, 2018 U.S. App. LEXIS 241 (9th Cir. Jan. 4, 2018).  The appellate court analyzed the statute, subsection-by-subsection.

Subsection (a).  Subsection (a) criminalizes entry into an agricultural production facility “by force, threat, misrepresentation or trespass.” The ALDF challenged only the misrepresentation prong of this subsection as unconstitutional and the appellate court agreed that it was unconstitutional, affirming the trial court.  The appellate court determined that, unlike lying to obtain records or gain employment (which are associated with a material benefit to the speaker), lying to gain entry merely allowed the speaker to cross the threshold of another’s property, including property that is generally open to the public. Thus, the appellate court determined that the provision was overbroad and could potentially criminalize behavior that, by itself, was innocent, and was targeted at speech and investigative journalists. The court stated that it saw no reason why the state could not narrow the subsection by requiring specific intent or by limiting criminal liability to statements that cause particular harm. The court also held that an easy solution to the First Amendment issue would be to simply strike the word “misrepresentation.”

Subsection (b).  Subsection (b) criminalizes obtaining records of an agricultural production facility by misrepresentation.  Unlike the trial court, the appellate court upheld this subsection on the basis that it protects against a legally cognizable harm associated with a false statement.  The court determined that unlike false statements made to enter property, false statements made to actually acquire agricultural production facility records inflict a property harm upon the owner, and may also bestow a material gain on the acquirer.

Subsection (c).  The appellate court also reversed the trial court’s finding of unconstitutionality with respect to subsection (c).  This subsection criminalizes knowingly obtaining employment with an agricultural production facility by misrepresentation with the intent to cause economic or other injury to the facility’s operations, property or personnel. The appellate court determined that subsection (c) properly followed U.S. Supreme Court guidance as to what constitutes a lie made for material gain. This was particularly the case, the appellate court noted, because subsection (c) limits criminal liability to only those who gain employment by misrepresentation and who have the intent to cause economic or other injury which further limits the scope of the subsection.

Subsection (d).  This subsection bars a person from entering a private agricultural production facility and, without express consent from the facility owner, making audio or video recordings of the “conduct of an agricultural production facility’s operations.” The appellate court determined that because the recording process is itself expressive and is inextricably intertwined with the resulting recording, the creation of audiovisual recordings is speech entitled to First Amendment protection as purely expressive activity. In addition, the appellate court concluded that the subsection was both under-inclusive and over-inclusive. It was under-inclusive by prohibiting audio or video recordings but saying nothing about photographs. It was over-inclusive and suppressed more speech than necessary to further Idaho’s stated goals of protecting property and privacy. Accordingly, the appellate court agreed with the trial court that subsection (d) was unconstitutionally defective.   

Conclusion

The Ninth Circuit’s opinion provides a roadmap for state lawmakers to follow to provide at least a minimal level of protection to animal production facilities from those that would intend to do them economic harm.  Barring entry to a facility by force, threat or trespass is allowed.  Likewise, the acquisition of economic data by misrepresentation can be prohibited.  Similarly, criminalizing the obtaining of employment by false pretenses coupled with the intent to cause harm to the animal production facility is not constitutionally deficient.  However, provisions that criminalize audiovisual recordings likely will not stand.  That conclusion shouldn’t trouble animal production facilities – if they are operating properly there is nothing to hide.    

January 9, 2018 in Regulatory Law | Permalink | Comments (0)

Wednesday, January 3, 2018

Top Ten Agricultural Law and Tax Developments of 2017 (Ten Through Six)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2017.  On Monday, I discussed those developments that were important but just not quite significant enough based on their national significance to make the top ten.  Today I start a two-day series on the top ten developments of 2017 with a discussion of developments 10 through six.  On Friday, developments five through one will be covered. To make my list, the development from the courts, IRS and federal agencies must have a major impact nationally on agricultural producers, agribusiness and rural landowners in general. 

Without further delay, here we go - the top developments for 2017 (numbers 10 through six).

  • 10 – South Dakota Enacts Unconstitutional Tax Legislation. In 2017, the South Dakota Supreme Court gave the South Dakota legislature and Governor what it wanted – a ruling that a recently enacted South Dakota law was unconstitutional.  South Dakota’s thirst for additional revenue led it to enact a law imposing sales tax on businesses that have no physical presence in the state.  That’s something that the U.S. Supreme Court first said 50 years ago that a state cannot do.  Accordingly, the South Dakota Supreme Court struck the law down as an unconstitutional violation of the Commerce Clause.  The legislature deliberately enacted the law so that it would be challenged as unconstitutional in order to set up a case in hopes that the U.S. Supreme Court would review it and reverse its longstanding position on the issue.  See, e.g., National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967) and Quill Corporation v. North Dakota, 504 U.S. 298 (1992).  If that happens, or the Congress takes action to allow states to impose sales (and/or use) tax on businesses with no physical presence in the state, the impact would be largely borne by small businesses, including home-based business and small agricultural businesses all across the country.  It would also raise serious questions about how strong the principle of federalism remains.  State v. Wayfair, Inc., et al., 901 N.W.2d 754 (S.D. Sup. Ct. 2017), pet. for cert. filed, Oct. 2, 2017.

  • 9 - Amendment to Bankruptcy Law Gives Expands Non-Priority Treatment of Governmental Claims. H.R. 2266, signed into law on October 26, 2017, contains the Family Farmer Bankruptcy Act (Act). The Act adds 11 U.S.C. §1232 which specifies that, “Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation”… is to be treated as an unsecured claim that arises before the bankruptcy petition was filed that is not entitled to priority under 11 U.S.C. §507 and is deemed to be provided for under a plan, and discharged in accordance with 11 U.S.C. §1228. The provision amends 11 U.S.C. §1222(a)(2)(A) to effectively override Hall v. United States, 132 Sup. Ct. 1882 (2012) where the U.S. Supreme Court held that tax triggered by the post-petition sale of farm assets was not discharged under 11 U.S.C. §1222(a)(2)(A). The Court held that because a Chapter 12 bankruptcy estate cannot incur taxes by virtue of 11 U.S.C. §1399, taxes were not “incurred by the estate” under 11 U.S.C. §503(b) which barred post-petition taxes from being treated as non-priority. The provision is effective for all pending Chapter 12 cases with unconfirmed plans and all new Chapter 12 cases as of October 26, 2017. H.R. 2266, Division B, Sec. 1005, signed into law on October 26, 2017.

  • 8 – “Hobby Loss” Tax Developments. 2017 saw two significant developments concerning farm and ranching activities that the IRS believes are not conducting with a business purpose and are, thus, subject to the limitation on deductibility of losses.     Early in 2017, the IRS issued interim guidance on a pilot program for Schedule F expenses for small business/self-employed taxpayer examinations.  It set the program to begin on April 1, 2017 and run for one year.  The focus will be on “hobby” farmers, and will involve the examination of 50 tax returns from tax year 2015.  The program could be an indication that the IRS is looking to increase the audit rate of returns with a Schedule F, and it may be more likely to impact the relatively smaller farming operations.  The interim guidance points out that the IRS believes that compliance issues may exist with respect to the deduction of expenses on the wrong form, or expenses that actually belonged to another taxpayer, or that should be subject to the hobby loss rules of I.R.C. §183.  Indeed, the IRS notes that a filter for the project will be designed to identify those taxpayers who have W-2s with large income and who also file a Schedule F “and may not have time to farm.”  In addition, the guidance informs IRS personnel that the examined returns could have start-up costs or be a hobby activity which would lead to non-deductible losses. The interim guidance also directs examiners to look for deductions that “appear to be excessive for the income reported.”  The implication is that such expenses won’t be deemed to be ordinary and necessary business expenses.  How that might impact the practice of pre-paying farm expenses remains to be seen.  The guidance also instructs examiners to pick through gas, oil, fuel, repairs, etc., to determine the “business and non-business parts” of the expense without any mention of the $2,500 safe harbor of the repair regulations.  The interim guidance would appear to be targeted toward taxpayers that either farm or crop share some acres where the income ends up on Schedule F, but where other non-farm sources of income predominate (e.g., W-2 income, income from leases for hunting, bed and breakfast, conservation reserve program payments, organic farming, etc.).  In those situations, it is likely that the Schedule F expenses will exceed the Schedule F income.  That’s particularly the case when depreciation is claimed on items associated with the “farm” - a small tractor, all-terrain vehicle, pickup truck, etc.  That’s the typical hobby loss scenario that IRS is apparently looking for.

    The second development on the hobby loss issue was a Tax Court opinion issued by Judge Paris in late 2017.  The case involved a diversified ranching operation that, for the tax years at issue, had about $15 million in losses and gross income of $7 million.  For those years, the petitioner’s primary expense was  depreciation. The IRS claimed that the ranching activity was not engaged in for profit and the expenses were deductible only to the extent of income. The Tax Court determined that all of the petitioner’s activities were economically intertwined and constituted a single ranching activity. On the profit issue, the court determined that none of the factors in the Treasury Regulations §1.183-2(b) favored the IRS. Accordingly, the petitioner’s ranching activity was held to be conducted for-profit and the losses were fully deductible. The court specifically rejected the IRS argument that a profit motive could not be present when millions of dollars of losses were generated.  That’s a very important holding for agriculture.  Depreciation is often the largest deduction on a farm or ranch operation’s return.  Welch, et al. v. Comr., T.C. Memo. 2017-229.

  • 7 - Beneficial Use Doctrine Established Water Right That Feds Had Taken.  In late 2017, the U.S. Court of Federal Claims issued a very significant opinion involving vested water rights in the Western United States.  The court ruled that the federal government had taken the vested water rights of the plaintiff, a New Mexico cattle ranching operation, which required compensation under the Fifth Amendment.  The court determined that the plaintiff had property rights by virtue of having “made continuous beneficial use of stock water sources” predating federal ownership.  Those water rights pre-dated 1905, and the U.S. Forest Service (USFS) had allowed that usage from 1910 to 1989.  The court also agreed with the plaintiff’s claim the water was “physically taken” when the United States Forest Service (USFS) blocked the plaintiff’s livestock from accessing the water that had long been used by the plaintiff and its predecessors to graze cattle so as to preserve endangered species.

    More specifically, the plaintiff held all “cattle, water rights, range rights, access rights, and range improvements on the base property, as well as the appurtenant federally-administered grazing allotment known as the Sacramento Allotment” in New Mexico. The plaintiff obtained a permit in 1989 from the USFS to graze cattle on an allotment of USFS land which allowed for the grazing of 553 cows for a 10-year period. At the time the permit was obtained, certain areas of the allotment were fenced off, but the USFS allowed the plaintiff’s cattle access to water inside the fenced areas. However, in 1996, the USFS notified the plaintiff that cattle were not permitted to graze inside the fenced areas, but then later allowed temporary grazing due to existing drought conditions. In 1998, the USFS barred the plaintiff from grazing cattle inside the fenced areas, but then reissued the permit in 1999 allowing 553 cattle to graze the allotment for 10 years subject to cancellation or modification as necessary. The permit also stated that “livestock use” was not permitted inside the fenced area. In 2001, the USFS denied the plaintiff’s request to pipe water from the fenced area for cattle watering and, in 2002, the USFS ordered the plaintiff to remove cattle that were grazing within the fenced area. Again in 2006, the plaintiff sought to pipe water from a part of the fenced area, but was denied. A U.S. Fish and Wildlife Service Biological Opinion in 2004 recommended the permanent exclusion of livestock from the allotment, and the plaintiff sued for a taking of its water rights which required just compensation. While the parties were able to identify and develop some alternative sources of water, that did not solve the plaintiff’s water claims and the plaintiff sued.

    The court determined that the plaintiff’s claim was not barred by the six-year statute of limitations because the plaintiff’s claim accrued in 1998 when the USFS took the first “official” action barring the grazing of cattle in the fenced area. The court also determined that under state (NM) law, the right to the beneficial use of water is a property interest that is a distinct and severable interest from the right to use land, with the extent of the right dependent on the beneficial use. The court held that the “federal appropriation of water does not, per se constitute a taking….Instead, a plaintiff must show that any water taken could have been put to beneficial use.” The court noted that NM law recognizes two types of appropriative water rights – common law rights in existence through 1907 and those based on state statutory law from 1907 forward. The plaintiff provided a Declaration of Ownership that had been filed with the New Mexico State Engineer between 1999 and 2003 for each of the areas that had been fenced-in. Those Declarations allow a holder of a pre-1907 water right to specify the use to which the water is applied, the date of first appropriation and where the water is located. Once certified, the Declaration of Ownership is prima facie evidence of ownership. The court also noted that witnesses testified that before 1907, the plaintiff’s predecessor’s in interest grazed cattle on the allotment and made beneficial use of the water in the fenced areas. Thus, the court held that the plaintiff had carried its burden to establish a vested water right. The plaintiff’s livestock watering also constituted a “diversion” required by state law.   Thus, the USFS action constituted a taking of the plaintiff’s water right.  Importantly, the court noted that a permanent physical occupation does not require in every instance that the occupation be exclusive, or continuous and uninterrupted.  The key, the court noted, was that the effects of the government’s action was so complete to deprive the plaintiff of all or most of its interest.  The court directed the parties to try to determine whether alternative water sources could be made available to the plaintiff to allow the ranching operation to continue on a viable basis.  If not, the court will later determine the value of the water rights taken for just compensation purposes. Sacramento Grazing Association v. United States, No. 04-786 L. 2017 U.S. Claims LEXIS 1381 (Fed. Cl. Nov. 3, 2017).

  • 6 – Department of Labor Overtime Rules Struck Down. In 2017, a federal court in Texas invalidated particular Department of Labor (DOL) rules under the Fair Labor Standards Act (FLSA).  The invalidation will have a significant impact on agricultural employers.  The FLSA exempts certain agricultural employers and employees from its rules.  However, one aspect of the FLSA that does apply to agriculture are the wage requirements of the law, both in terms of the minimum wage that must be paid to ag employment and overtime wages.  But, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12)The agricultural exemption is broad, defining “agriculture” to include “farming in all its branches [including] the raising of livestock, bees, fur-bearing animals, or poultry,…and the production, cultivation, growing, and harvesting of...horticultural commodities and any practices performed by a farmer or on a farm as an incident to or in conjunction with farming operations.”   In addition, exempt are “executive” workers whose primary duties are supervisory and the worker supervises 2 or more employees.  Also exempt are workers that fall in the “administrative” category who provide non-manual work related to the management of the business, and workers defined as “professional” whose job is education-based and requires advanced knowledge.  Many larger farming and ranching operations have employees that will fit in at least one of these three categories.  For ag employees that are exempt from the overtime wage payment rate because they occupy an “executive” position, they must be paid a minimum amount of wages per week.

    Until December 1, 2016, the minimum amount was $455/week ($23,660 annually).  Under the Obama Administration’s DOL proposal, however, the minimum weekly amount was to increase to $913 ($47,476 annually).  Thus, an exempt “executive” employee that is paid a weekly wage exceeding $913 is not entitled to be paid for any hours worked exceeding 40 in a week.  But, if the $913 weekly amount was not met, then the employee would generally be entitled to overtime pay for the hours exceeding 40 in a week.  Thus, the proposal would require farm businesses to track hours for those employees it historically has not tracked hours for – executive employees such as managers and those performing administrative tasks.  But, remember, if the employee is an agricultural worker performing agricultural work, the employee need not be paid for the hours in excess of 40 in a week at the overtime rate.  The proposal also imposes harsh penalties for noncompliance.  Before the new rules went into effect, many states and private businesses sued to block them.  The various lawsuits were consolidated into a single case, and in November of 2016, the court issued a temporary nationwide injunction blocking enforcement of the overtime regulations.  Nevada v. United States Department of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016).

    On Aug. 31, 2017, the court entered summary judgment for the plaintiffs in the case thereby invalidating the regulations.   In its ruling, the court focused on the congressional intent behind the overtime exemptions for “white-collar” workers as well as the authority of the DOL to define and implement those exemptions.  The court also concluded that the DOL did not have any authority to categorically exclude workers who perform exempt duties based on salary level alone, which is what the court said that the DOL rules did.  The court noted that the rules more than doubled the required salary threshold and, as a result, “would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.”  The court went on to state that the overtime rules make “overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.”  The court noted that his was contrary to the clear intent of the Congress and, as a result, the rules were invalid.   The court’s ruling invalidating the overtime rules is an important victory for many agricultural (and other) businesses.  It alleviates an increased burden to maintain records for employees in executive positions (e.g., managers and administrators), and the associated penalties for non-compliance.  The case is Nevada v. United States Department of Labor, No. 4:16-cv-731, 2017 U.S. Dist. LEXIS 140522 (E.D. Tex. Aug. 31, 2017). 

Conclusion

Those are the "bottom five" of the "top 10" developments of 2017.  On Friday I will reveal what I believe to be the top five developments.

January 3, 2018 in Bankruptcy, Regulatory Law, Water Law | Permalink | Comments (0)

Monday, January 1, 2018

The “Almost Top Ten” Agricultural Law and Tax Developments of 2017

Overview

This week I will be writing about what I view as the most significant developments in agricultural law and agricultural taxation during 2017. There were many important happenings in the courts, the IRS and with administrative agencies that have an impact on farm and ranch operations, rural landowners and agribusinesses. What I am writing about this week are those developments that will have the biggest impact nationally. Certainly, there were significant state developments, but they typically will not have the national impact of those that result from federal courts, the IRS and federal agencies.

It's tough to get it down to the ten biggest developments of the year, and I do spend considerable time sorting through the cases and rulings get to the final cut. Today’s post examines those developments that I felt were close to the top ten, but didn’t quite make the list. Later this week we will look at those that I feel were worthy of the top ten. Again, the measuring stick is the impact that the development has on the U.S. ag sector as a whole.

Almost, But Not Quite

Those developments that were the last ones on the chopping block before the final “top ten” are always the most difficult to determine. But, as I see it, here they are (in no particular order):

  • Withdrawal of Proposed I.R.C. §2704 Regulations. In the fall of 2016, the Treasury Department issued proposed regulations (REG-16113-02) involving valuation issues under I.R.C. §2704. The proposed regulations would have established serious limitations on the ability to establish valuation discounts (e.g., minority interest and lack of marketability) for estate, gift and generation-skipping transfer tax purposes via estate and business planning techniques. In early December of 2016, a public hearing was held concerning the proposed regulations.  However, the proposed regulations were not finalized before President Trump took office. In early October of 2017, the Treasury Department announced that it was pulling several tax regulations identified as burdensome under President Trump’s Executive Order 13789, including the proposed I.R.C. §2704 regulations. Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (Oct. 4, 2017).

    Note: While it is possible that the regulations could be reintroduced in the future with revisions, it is not likely that the present version will ultimately be finalized under the current Administration.

  • IRS Says There Is No Exception From Filing a Partnership Return. The IRS Chief Counsel’s Office, in response to a question raised by an IRS Senior Technician Reviewer, has stated that Rev. Prov. 84-35, 1984-2 C.B. 488, does not provide an automatic exemption from the requirement to file Form 1065 (U.S. Return of Partnership Income) for partnerships with 10 or fewer partners. Instead, the IRS noted that such partnerships can be deemed to meet a reasonable cause test and are not liable for the I.R.C. §6698 penalty. IRS explained that I.R.C. §6031 requires partnerships to file Form 1065 each tax year and that failing to file is subject to penalties under I.R.C. §6698 unless the failure to file if due to reasonable cause. Neither I.R.C. §6031 nor I.R.C. §6698 contain an automatic exception to the general filing requirement of I.R.C. §6031(a) for a partnership as defined in I.R.C. §761(a). IRS noted that it cannot determine whether a partnership meets the reasonable cause criteria or qualifies for relief under Rev. Proc. 84-35 unless the partnership files Form 1065 or some other document. Reasonable cause under Rev. Proc. 84-35 is determined on a case-by-case basis and I.R.M. Section 20.1.2.3.3.1 sets forth the procedures for applying the guidance of Rev. Proc. 84-35. C.C.A. 201733013 (Jul. 12, 2017); see also Roger A. McEowen, The Small Partnership 'Exception,' Tax Notes, April 17, 2017, pp. 357-361.

  • “Qualified Farmer” Definition Not Satisfied; 100 Percent Deductibility of Conservation Easement Not Allowed. A “qualified farmer” can receive a 100 percent deduction for the contribution of a permanent easement to a qualified organization in accordance with I.R.C. §170(b)(1)(E). However, to be a “qualified farmer,” the taxpayer must have gross income from the trade or business of farming that exceeds 50 percent of total gross income for the tax year. In a 2017, the U.S. Tax Court decided a case where the petitioners claimed that the proceeds from the sale of the property and the proceeds from the sale of the development rights constituted income from the trade or business of farming that got them over the 50 percent threshold.  The IRS disagreed, and limited the charitable deduction to 50 percent of each petitioner’s contribution base with respect to the conservation easement. The court agreed with the IRS. The court noted that the income from the sale of the conservation easement and the sale of the land did not meet the definition of income from farming as set forth in I.R.C. §2032A(e)(5) by virtue of I.R.C. §170(b)(1)(E)(v). The court noted that the statute was clear and that neither income from the sale of land nor income from the sale of development rights was included in the list of income from farming. While the court pointed out that there was no question that the petitioners were farmers and continued to be after the conveyance of the easement, they were not “qualified farmers” for purposes of I.R.C. §170(b)(1)(E)(iv)(I). Rutkoske v. Comr., 149 T.C. No. 6 (2017).

  • Corporate-Provided Meals In Leased Facility Fully Deductible. While the facts of the case have nothing to do with agriculture, the issues involved are the same ones that the IRS has been aggressively auditing with respect to farming and ranching operations – namely, that the 100 percent deduction for meals provided to corporate employees for the employer’s convenience cannot be achieved if the premises where the meals are provided is not corporate-owned. In a case involving an NHL hockey team, the corporate owner contracted with visiting city hotels where the players stayed while on road trips to provide the players and team personnel pre-game meals. The petitioner deducted the full cost of the meals, and the IRS limited the deduction in accordance with the 50 percent limitation of I.R.C. §274(n)(1). The court noted that the 50 percent limitation is inapplicable if the meals qualify as a de minimis fringe benefit and are provided in a nondiscriminatory manner. The court determined that the nondiscriminatory requirement was satisfied because all of the staff that traveled with the team were entitled to use the meal rooms. The court also determined that the de minimis rule was satisfied if the eating facility (meal rooms) was owned or leased by the petitioner, operated by the petitioner, located on or near the petitioner’s business premises, and the meals were furnished during or immediately before or after the workday. In addition, the court determined that the rules can be satisfied via contract with a third party to operate an eating facility for the petitioner’s employees. As for the business purpose requirement, the court noted that the hotels where the team stayed at while traveling for road games constituted a significant portion of the employees’ responsibilities and where the team conducted a significant portion of its business. Thus, the cost of the meals qualified as a fully deductible de minimis fringe benefit. Jacobs v. Comr., 148 T.C. No. 24 (2017).

    Note: The petitioner’s victory in the case was short-lived. The tax bill enacted into law on December 22, 2017, changes the provision allowing 100 percent deductibility of employer-provided meals to 50 percent effective Jan. 1, 2018, through 2025. After 2025, no deduction is allowed.

  • Settlement Reached In EPA Data-Gathering CAFO Case. In 2008, the Government Accounting Office (GAO) issued a report stating that the Environmental Protection Agency (EPA) had inconsistent and inaccurate information about confined animal feeding operations (CAFOs), and recommended that EPA compile a national inventory of CAFO’s with NPDES permits. Also, as a result of a settlement reached with environmental activist groups, the EPA agreed to propose a rule requiring all CAFOs to submit information to the EPA as to whether an operation had an NPDES permit. The information required to be submitted had to provide contact information of the owner, the location of the CAFO production area, and whether a permit had been applied for. Upon objection by industry groups, the proposed rule was withdrawn and EPA decided to collect the information from federal, state and local government sources. Subsequent litigation determined that farm groups had standing to challenge the EPA’s conduct and that the EPA action had made it much easier for activist groups to identify and target particular confined animal feeding operations (CAFOs). On March 27, 2017, the court approved a settlement agreement ending the litigation between the parties. Under the terms of the settlement, only the city, county, zip code and permit status of an operation will be released. EPA is also required to conduct training on FOIA, personal information and the Privacy Act. The underlying case is American Farm Bureau Federation v. United States Environmental Protection Agency, 836 F.3d 963 (8th Cir. 2016).

  • Developments Involving State Trespass Laws Designed to Protect Livestock Facilities.

    • Challenge to North Carolina law dismissed for lack of standing. The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a NC employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act stifled their ability to investigate NC employers for illegal or unethical conduct and restricted the flow of information those investigations provide in violation of the First and Fourteenth Amendments of the U.S. Constitution and various provisions of the NC Constitution.  The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).

    • Utah law deemed unconstitutional. Utah law (Code §76-6-112) (hereinafter Act) criminalizes entering private agricultural livestock facilities under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility.  Anti-livestock activist groups sued on behalf of the citizen-activist claiming that the Act amounted to an unconstitutional restriction on speech in violation of the First Amendment. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist”. For those reasons, the court determined that the act was unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017).

    • Wyoming law struck down. In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" includes numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech under the First Amendment in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection or resource data. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016).

  • GIPSA Interim Final Rule on Marketing of Livestock and Poultry Delayed and Withdrawn.In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) interim final rules that provide the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The interim final rules concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. Under the proposed regulations, "likelihood of competitive injury" is defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It includes, but is not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue. On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017. However, on October 18, 2017, GIPSA officially withdrew the proposed rule. Related to, but not part of, the GIPSA Interim Final Rule, a poultry grower ranking system proposed rule was not formally withdrawn.

  • Syngenta Settlement. In late 2017, Syngenta publicly announced that it was settling farmers’ claims surrounding the alleged early release of Viptera and Duracade genetically modified corn. While there are numerous cases and aspects of the litigation involving Syngenta, the settlement involves what is known as the “MIR 162 Corn Litigation” and a Minnesota state court class action. The public announcement of the settlement indicated that Syngenta would pay $1.5 billion.

  • IRS To Finalize Regulations on the Tax Status of LLC and LLP Members. In its 2017-2018 Priority Guidance Plan, the IRS states that it plans to finalize regulations under I.R.C. §469(h)(2) – the passive loss rules that were initially proposes in 2011. That provision creates a per se rule of non-material participation for limited partner interests in a limited partnership unless the Treasury specifies differently in regulations. Those regulations were initially issued in temporary form and became proposed regulations in 2011. Is the IRS preparing to take a move to finalize regulations taking the position that they the Tax Court refused to sanction? Only time will tell, but the issue is important for LLC and LLP members. The issue boils down to the particular provisions of a state’s LLC statute and whether there are sufficient factors under the state statute that distinguish an LLC from a limited partnership. That will be the case until IRS issues regulations dealing specifically with LLCs and similar entities. The proposed definition would make it easier for LLC members and some limited partners to satisfy the material participation requirements for passive loss purposes, consistent with the court opinions that IRS has recently lost on the issue. Specifically, the proposed regulations require that two conditions have to be satisfied for an individual to be classified as a limited partner under I.R.C. §469(h)(2): (1) the entity must be classified as a partnership for federal income tax purposes; and (2) the holder of the interest must not have management rights at any time during the entity’s tax year under local law and the entity’s governing agreement. Thus, LLC members of member-managed LLCs would be able to use all seven of the material participation tests, as would limited partners that have at least some rights to participate in managerial control or management of a partnership.

  • Fourth Circuit Develops New Test for Joint Employment Under the FLSA. The Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. §§ 201 et seq.) as originally enacted, was intended to raise the wages and shorten the working hours of the nation's workers. The FLSA is very complex, and not all of it is pertinent to agriculture and agricultural processing, but the aspect of it that concerns “joint employment” is of major relevance to agriculture. Most courts that have considered the issue have utilized an “economic realities” or “control” test to determine if one company’s workers are attributable to another employer for purposes of the FLSA. But, in a 2017 case, the U.S. Court of Appeals for the Fourth Circuit, created a new test for joint employment under the FLSA that appears to expand the definition of “joint employment” and may create a split of authority in the Circuit Courts of Appeal on the issue. The court held that the test under the FLSA for joint employment involved two steps. The first step involved a determination as to whether two or more persons or entities share or agree to allocate responsibility for, whether formally or informally, directly or indirectly, the essential terms and conditions of a worker’s employment. The second step involves a determination of whether the combined influence of the parties over the essential terms and conditions of the employment made the worker an employee rather than an independent contractor. If, under this standard, the multiple employers were not completely disassociated, a joint employment situation existed. The court also said that it was immaterial that the subcontractor and general contractor engaged in a traditional business relationship. In other words, the fact that general contractors and subcontractor typically structure their business relationship in this manner didn’t matter. The Salinas court then went on to reason that separate employment exists only where the employers are “acting entirely independent of each other and are completely disassociated with respect to” the employees. The court’s “complete disassociation” test appears that it could result in a greater likelihood that joint employment will result in the FLSA context than would be the case under the “economic realities” or “control” test. While the control issue is part of the “complete disassociation” test, joint determination in hiring or firing, the duration of the relationship between the employers, where the work is performed and responsibility over work functions are key factors that are also to be considered. Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017), rev’g, No. JFM-12-1973, 2014 U.S. Dist. LEXIS 160956 (D. Md. Nov. 17, 2014).

  • Electronic Logs For Truckers. On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect.  80 Fed. Reg. 78292 (Dec.16, 2015).  The final rule, which was issued in late 2015, could have a significant impact on the livestock industry and livestock haulers. The new rule will require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18. The devices connect to the vehicle's engine and automatically record driving hours. The Obama Administration pushed for the change to electronic logs purportedly out of safety concerns. The Trump Administration has instructed the FMCSA (and state law enforcement officials) to delay the December 18 enforcement of the final rule by delaying out-of-service orders for ELD violations until April 1, 2018, and not count ELD violations against a carrier’s Compliance, Accountability, Safety Score. Thus, from December 18, 2017 to April 1, 2018, any truck drivers who are caught without an electronic logging device will be cited and allowed to continue driving, as long as they are in compliance with hours-of-service rules. In addition, the FMCSA has granted a 90-day waiver for all vehicles carrying agricultural commodities. Other general exceptions to the final rule exist for vehicles built before 2000, vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)), drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)), and drivers who maintain HOS logs for no more than eight days during any 30-day period. One rule that is of particular concern is an HOS requirement that restricts drive time to 11 hours. This rule change occurred in 2003 and restricts truck drivers to 11 hours of driving within a 14-hour period. Ten hours of rest is required. That is a tough rule as applied to long-haul cattle transports. Unloading and reloading cattle can be detrimental to the health of livestock.

  • Dicamba Spray-Drift Issues. Spray-drift issues with respect to dicamba and the use of  XtendiMax with VaporGrip (Monsanto) and Engenia (BASF) herbicides for use with Xtend Soybeans and Cotton were on the rise in 2017. , 2017Usage of dicamba has increased recently in an attempt to control weeds in fields planted with crops that are engineered to withstand it. But, Missouri (effective July 7) and Arkansas (as of June 2017) took action to ban dicamba products because of drift-related damage issues. In addition, numerous lawsuits have been filed by farmers against Monsanto, BASF and/or DuPont alleging that companies violated the law by releasing their genetically modified seeds without an accompanying herbicide and that the companies could have reasonably foreseen that seed purchasers would illegally apply off-label, older dicamba formulations, resulting in drift damage. Other lawsuits involve claims that the new herbicide products are unreasonably dangerous and have caused harm even when applicators followed all instructions provided by law. In December of 2017, the Arkansas Plant Board voted to not recommend imposing a cut-off date of April 15 for dicamba applications. Further consideration of the issue will occur in early 2018.

January 1, 2018 in Business Planning, Civil Liabilities, Environmental Law, Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, December 12, 2017

Electronic Logs For Truckers and Implications for Agriculture

Overview

There are several provisions in federal law that regulate the transport of livestock, other animals, poultry, fish, and insects.  Those rules generally concern animal health and safety, and driver safety.  The rules also apply to the transport of agricultural livestock.   However, in some instances, exceptions exist that apply to agriculture.    

On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) is set to go into effect.  80 Fed. Reg. 78292 (Dec.16, 2015).  The final rule, which was issued in late 2015, could have a significant impact on the livestock industry and livestock haulers.  The new rule will require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18. The devices connect to the vehicle's engine and automatically record driving hours.

The Obama Administration pushed for the change to electronic logs purportedly out of safety concerns.  But, what will be the impact of the new final rule on the livestock industry?  The federal government has a long history of regulating the transport of livestock in interstate commerce.  Today’s post examines provides a brief history of the federal regulation of transporting animals in interstate commerce and the implications for agriculture of finalizing the USDOT ELD and HOS rule.

Animal Welfare Act

As originally enacted in 1966, the Animal Welfare Act (7 U.S.C. §§ 2131 et  seq.) addressed the problem of an increase in the theft of pets and their sale for research.  The legislation was subsequently expanded to cover the mistreatment of animals in transportation and animal fighting ventures by any live bird, dog or other mammal except man.  The rules do not bar hunting with animals.

The major provisions of the legislation include licensing of those who handle pets, those who handle animals who might be used for research and ultimate dealers, exhibitors and auction operators.  The purchase of dogs and cats for research purposes is prohibited except from authorized operators.  The Act covers warm blooded animals used for research and experimentation.  Humane standards are imposed for the handling, care and transportation of animals covered by the Act.  Health certificates are required.  A five-day waiting period applies before dogs and cats can be sold by dealers and exhibitors.  Animals must be marked or otherwise identified.

”28 Hour Law”

The precursor to the present “28 Hour Law” was passed in 1873 to prevent cruelty to animals in interstate commerce by common carrier.  The Act was repealed in 1906 and replaced with the “28 Hour Law.” 15 U.S.C. § 1825(a).

The Act, sometimes referred to as the “Food and Rest Law,” prohibits some carriers from transporting animals beyond certain time limits.  For example, common carriers engaged in interstate commerce must unload animals for rest, water and feeding into properly equipped pens every 28 hours for at least five consecutive hours.  The Act applies to cattle, sheep, swine and other animals.  The original application of the law was with respect to trains, but the USDA revised existing regulations in 2006 to also apply to trucks.  However, the Act does not apply to the transport of animals by airplane.  Thus, the Act applies to transport by rail, boat or truck. 

Upon request, the 28-hour time limit may be extended to 36 hours.  Similarly, if the time period was exceeded because the unloading of animals was prevented “by storm or other accidental or unavoidable causes which cannot be anticipated or avoided by the exercise of due diligence and foresight,” the 28-hour time limit does not apply. 

A special rule exists for sheep.  Sheep do not have to be unloaded when the 28-hour time period expires at night.  In that event, the sheep can be continued for 36 hours without written consent.  A similar exception applicable to all animals is that no unloading is required if the animals have proper food, water, space and an opportunity to rest.  However, that is not usually the case with railroads and with other kinds of carriers. 

Monitoring Driver Hours – The FMCSA Final Rule

In the 1930s, the federal government established hours of service (HOS) rules for truck drivers.  Under the rules, truckers are required to maintain logbooks to record on-duty as well as off-duty hours.  It’s those rules that are set to change.  As noted above, the Federal Motor Carrier Safety Administration (FMCSA) issued a final rule in 2015 requiring most motor carriers and interstate truck drivers to start using electronic logs to ensure drivers are complying with hours-of-service rules. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule is set to go into effect on December 18, 2017.  It is estimated that the new rule will apply to more than three million truckers.  Presently, there are more than 200 ELDs that are self-certified and have been registered with the USDOT.

The FMCSA claims that the goal of the ELD mandate is to make roadways safer by providing the government with a greater ability to more closely track driver hours.  For fiscal year 2017, the FMCSA notes an increase of over 11 percent in citations for falsifying driver logs and a 14.8 percent increase in the number of truck drivers put out of service for falsifying logs.  During that same timeframe, false log violations accounted for 16.2 percent of the 186,596 out-of-service orders issued to truck drivers.  The FMCSA asserts that these statistics are justification for the ELD and HOS final rule. 

The Owner-Operator Independent Drivers Association (OOIDA) challenged the final rule based on a violation of privacy rights (Fourth Amendment), but the U.S. Court of Appeals for the Seventh Circuit rejected the argument.  Owner-Operator Independent Drivers Association, Inc., et al. v. United States Department of Transportation, et al., 840 F.3d 879 (7th Cir. 2016), cert. den., 137 S. Ct. 2246 (2017).   The court determined that the ELD mandate constituted a reasonable administrative inspection under the Fourth Amendment involving a pervasively regulated industry, and was not arbitrary or capricious.  The U.S. Supreme Court declined to hear the case, and a subsequent effort to override or delay the ELD rule legislatively failed.

The Trump Administration has instructed the FMCSA (and state law enforcement officials) to delay the December 18 enforcement of the final rule by delaying out-of-service orders for ELD violations until April 1, 2018, and not count ELD violations against a carrier’s Compliance, Accountability, Safety Score.  Thus, from December 18, 2017 to April 1, 2018, any truck drivers who are caught without an electronic logging device will be cited and allowed to continue driving, as long as they are in compliance with hours-of-service rules.

Impact on agriculture.  The agricultural industry has raised concern over how the ELD rule will impact its stakeholders.  Data indicate that the livestock sector has consistently been one of the safest of the commercial hauling sectors. The Large Truck Crash Causation Study, conducted by the Federal Motor Carrier Safety Administration (FMCSA) and the National Highway Traffic Safety Institute, showed that of 1,123 accidents involving trucks hauling cargo, only five involved the transportation of livestock. Another report, the Transportation Institute’s Trucks Involved in Fatal Accidents Fact-book 2005, shows that livestock transporters accounted for just 0.7 percent of fatal accidents.

Exceptions.  There are numerous exceptions to the ELD final rule.  While the mandate is set to go into effect December 18, 2017, the FMCSA has granted a 90-day waiver for all vehicles carrying agricultural commodities.  Other general exceptions to the final rule exist for vehicles built before 2000, vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)), drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)), and drivers who maintain HOS logs for no more than eight days during any 30-day period. 

Several ag groups have also petitioned the FMCSA for a limited exemption from ELDs for agricultural trucks.  There still remains a chance (slim as it may be) that an exemption for ag could be slipped into the tax bill that House and Senate conferees are presently marking up, or in an appropriations bill to continue the funding of the federal government. 

One rule that is of particular concern is an HOS requirement that restricts drive time to 11 hours.  This rule change occurred in 2003 and restricts truck drivers to 11 hours of driving within a 14-hour period.  Ten hours of rest is required.  That is a tough rule as applied to long-haul cattle transports.  Unloading and reloading cattle can be detrimental to the health of livestock.  An exemption from that restriction seems to be in order.

Conclusion

The federal government has long been involved in the regulation of the interstate transport of livestock and drivers.  The FMCSA final rule is generally opposed by the transportation industry as well as the ag industry.  Fortunately, some exemptions exist to relieve the burden on livestock transporters.  Nevertheless, the finalization of the rule and eventual implementation merits attention. 

December 12, 2017 in Regulatory Law | Permalink | Comments (0)