Monday, February 26, 2024

Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs? (An Update)

Overview

In response to attempts to shut down animal confinement operations by activist groups, legislatures in several states have enacted laws designed to protect these businesses by limiting access. A common approach is for the law to criminalize the use of deception to access a confined livestock facility or meatpacking plant with the intent to cause physical harm, economic harm or some other type of injury to the business. But the laws have generally been struck down on free speech and equal protection grounds.  Is there a way for states to provide legal protection to confinement livestock facilities? 

What can these facilities do to protect themselves?  I wrote about this issue last spring and since that time the U.S. Court of Appeals for the Eighth Circuit has issued a significant opinion.  That makes an update in order.

Laws designed to protect confined animal livestock facilities from those intended to do them harm – it’s the topic of today’s post.

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.  Laws that bar lying and trespass coupled with the intent to do physical harm to an animal production facility should not be constitutionally deficient.  Laws that go beyond those confines may be. 

The Iowa provisions.  Iowa legislation is a common example of how states have attempted to address the issue.  The Iowa legislature has made two attempts at crafting a state law that would withstand a constitutional challenge.  The initial version, enacted in 2012, criminalized “agricultural production facility fraud” if a person willfully obtained access to such a facility by false pretenses (the “access” provision) or made a false statement or representation as part of an application or agreement to be employed at the facility (the “employment” provision).  The law also required the person to know that the statement was false when made and that it was made with an intent to commit a knowingly unauthorized act.  Iowa Code §717A.3A.  This initial statutory version was challenged and the employment provision was deemed unconstitutional.

The Iowa legislature then modified the law with a second version that described an agricultural production facility trespass as occurring when a person uses deception “on a matter that would reasonably result in a denial of access to an agricultural production facility that is not open to the public, and, through such deception, gains access to [the facility], with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “access” provision].”  Iowa Code §717.3B.  The revised law also criminalizes the use of deception “on a matter that would reasonably result in a denial of an opportunity to be employed  at [a facility] that is not open to the public, and, through such deception, is so employed, with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “employment” provision].

Note:  In other words, the Iowa provisions criminalize the use of lies to either gain access or employment at an ag production facility where the use is coupled with the intent to do harm. 

Recent Court Opinions

North Carolina.  In 2017, a challenge to the North Carolina statutory provision was dismissed for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017). The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act.  They claimed that the law unconstitutionally stifled their ability to investigate North Carolina employers for illegal or unethical conduct and restricted the flow of information those investigations provide.  As noted, the court dismissed the case for lack of standing. On appeal, however, the appellate court reversed.  PETA, Inc. v. Stein, 737 Fed. Appx. 122 (4th Cir. 2018).  The appellate court determined that the plaintiffs had standing to challenge the law through its “chilling effect” on their First Amendment rights to investigate and publicize actions on private property.  They also alleged a reasonable fear that the law would be enforced against them. 

On the merits, the trial court then held that the challenged provisions of the law were unconstitutional under the First Amendment as a violation of the plaintiffs’ free speech rights. There was a direct implication of speech, the court reasoned, because recordings and image capture constituted speech and the Act was unconstitutional under intermediate scrutiny.  People for the Ethical Treatment of Animals, Inc. v. Stein, 466 F. Supp. 3d 547 (M.D.  N.C. 2020).

On further review, the appellate court affirmed in part and reversed in part.  People for the Ethical Treatment of Animals, Inc. v. North Carolina Farm Bureau Federation, Inc., 60 F.4th 815 (4th Cir. 2023).  The appellate court determined that the First Amendment protects the right to surreptitiously record in an "employer's nonpublic areas as part of newsgathering" and that, therefore, the Act was unconstitutional when it was applied to bar the undercover activities that the plaintiff wanted to conduct on private property. 

Note:  The Attorney General of North Carolina sought the U.S. Supreme Court's review, but the Court declined.  North Carolina Farm Bureau Federation, Inc. v. People for the Ethical Treatment of Animals, Inc., 144 S. Ct. 325 (2023).  

Utah.  The Utah law was also deemed unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017). At issue was Utah Code §76-6-112 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.  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. 

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. 

Note:  The appellate court remanded the case to the trial court for a determination of the appropriate level of scrutiny and whether the statutes survived review.   Ultimately, the trial court granted the plaintiffs’ motion for summary judgment, finding that the statutes were content based and, as such failed to withstand constitutional strict scrutiny review on the basis that the laws were not narrowly tailored.  Western Watersheds Project v. Michael, 353 F. Supp. 3d 1176 (D. Wyo. 2018). 

Ninth Circuit.  In early 2018, the U.S. Circuit Court of Appeals for the Ninth Circuit issued a detailed opinion involving the Idaho statutory provision.  Animal Legal Defense Fund v. Wasden, 878 F.3d 1184 (9th Cir. 2018).  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.  According to the Ninth Circuit, state legislation can bar entry to a facility by force, threat or trespass.  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 are suspect. 

The Iowa experience.  In 2021, the U.S. Court of Appeals for the Eighth Circuit construed the 2012 version of the Iowa law and upheld the portion of it providing for criminal penalties for gaining access to a covered facility by false pretenses.  Animal Legal Defense Fund v. Reynolds, 8 F.4th 781 (8th Cir. 2021).  This is the first time that any federal circuit court of appeals has upheld a provision that makes illegal the gaining of access to a covered facility by lying.   

Conversely, the court held that the employment provision of the law (knowingly making a false statement to obtain employment) violated the First Amendment because the law was not limited to false claims that were made to gain an offer of employment.  Instead, the provision provided for prosecution of persons who made false statements that were incapable of influencing an offer of employment.  A prohibition on immaterial falsehoods was not necessary to protect the State’s interest – such as false exaggerations made to impress the job interviewer.  The court determined that barring only false statements that were material to a hiring decision was a less restrictive means to achieve the State’s interest. 

Note.  The day before the Eighth Circuit issued its opinion concerning the Iowa law, it determined that plaintiffs challenging a comparable Arkansas law had standing the bring the case.  Animal Legal Defense Fund v. Vaught, 8 F.4th 714 (8th Cir. 2021).  The court later denied a petition for rehearing.   Animal Legal Defense Fund v. Vaught, No. 20-1538, 2021 U.S. App. LEXIS 27712 (8th Cir. Sept. 15, 2021). 

In late 2019, the plaintiffs in the Iowa case filed suit to enjoin the second version of the Iowa law – Iowa Code §717A.3B.  The trial court agreed and preliminary enjoined the revised law.  The plaintiffs then filed a motion for summary judgment in early 2020 and the state filed a cross motion for summary judgment, and the case was continued while the appellate court was considering the case involving the initial version of the Iowa law.  As noted above, the appellate court ultimately upheld the access provision but not the employment provision.  The trial court, in the current case upheld the plaintiffs’ motion for summary judgment, finding that the revised statutory language had been slightly modified, but was substantially similar to the initial version.  As such, the trial court determined that the revised statute discriminated based on content and viewpoint and was unconstitutional under a strict scrutiny analysis.  Animal Legal Defense Fund v. Reynolds, No. 4:19-cv-00124-SMR-HCA, 2022 U.S. Dist. LEXIS 48142 (S.D. Iowa Mar. 14, 2022). 

Iowa also has another law that bears on the issue.  Iowa Code § 727.8A makes it a crime for “a person committing a trespass as defined in section 716.7 to knowingly place or use a camera or electronic surveillance device that transmits or records images or data while the device is on the trespassed property.” 

Iowa Code §716.7 defines a trespass as follows:

  1. a. “Trespass” shall mean one or more of the following acts:

(1) Entering upon or in property without the express permission of the owner, lessee, or person in lawful possession with the intent to commit a public offense, to use, remove therefrom, alter, damage, harass, or place thereon or therein anything animate or inanimate,….

(2) Entering or remaining upon or in property without justification after being notified or requested to abstain from entering or to remove or vacate therefrom by the owner, lessee, or person in lawful possession, or the agent or employee of the owner, lessee, or person in lawful possession, or by any peace officer, magistrate, or public employee whose duty it is to supervise the use or maintenance of the property. A person has been notified or requested to abstain from entering or remaining upon or in property within the meaning of this subparagraph (2) if any of the following is applicable:

(a) The person has been notified to abstain from entering or remaining upon or in property personally, either orally or in writing, including by a valid court order under chapter 236.

(b) A printed or written notice forbidding such entry has been conspicuously posted or exhibited at the main entrance to the property or the forbidden part of the property.

(3) Entering upon or in property for the purpose or with the effect of unduly interfering with the lawful use of the property by others.

(4) Being upon or in property and wrongfully using, removing therefrom, altering, damaging, harassing, or placing thereon or therein anything animate or inanimate, without the implied or actual permission of the owner, lessee, or person in lawful possession.

Note:  An initial conviction for violation of Iowa Code § 727.8A is an aggravated misdemeanor and a second conviction is a class “D” felony.

In Animal Legal Defense Fund, et al. v. Reynolds, et al., 630 F. Supp.3d 1105 (S.D. Iowa. 2022), the plaintiffs (animal rights activist groups) claimed the statute violated their First Amendment rights by hindering them from gaining access to farms and dairies under false pretenses of seeking a job to be able to take pictures and/or videos without the property owner’s consent.  The defendants asserted that the case should be dismissed for lack of standing and lack of ripeness.

The trial court (the same Obama-appointed judge that ruled earlier in 2022 on another variant of the Iowa laws) held that the plaintiffs had standing because their organizational objectives would be hindered, and that an arrest is not required before a criminal statute can be challenged.  The trial court noted that the statute prohibited video recordings (which the court asserted was protected “speech”) while trespassing which the plaintiffs considered important to broadcasting their negative messages about animal agriculture to the public.  More specifically, the court determined that the statute singled out conduct (that the plaintiffs contemplated) by expanding the penalty for conduct already prohibited by law and was not limited to specific uses of a camera.  Accordingly, the court determined that the statute was an unconstitutional restriction on the free speech rights of trespassers apparently on the basis that regulating free speech on private property would create a “slippery slope” for not allowing people to record politicians or express views about the Government.   In addition, any recording, production, editing, and publication of the videos is protected speech.  The court granted summary judgment to the plaintiffs. 

The trial court’s view, made it practically impossible for farmers to protect their farming operations from those intending to inflict harm via protected “speech.” Is the trial court saying that there is a constitutional right to trespass?  If so, that is flatly contrary to the U.S. Supreme Court opinion of Cedar Point Nursery, et al. v. Hassid, et al., 141 S. Ct. 2063 (2021).   

Note:  Interestingly (and hypocritically) the Iowa federal district court’s website contains the following information: “To be admitted into the courthouse, you must present a government issued photo identification.  Please be aware the following items are NOT allowed in the courthouse: cell phones, cameras, other electronic devices (including Apple watches), recording devices,…”.

Note:  Iowa Code §716.7A, the Food Operation Trespass Law, remains in effect.  That law, effective on June 20, 2020, treats as an aggravated misdemeanor a first offense of entering or remaining on the property of a food operation without the consent of a person who has real or apparent authority to allow the person to enter or remain on the property.  A subsequent offense is a Class D felony.  This statutory provision was upheld as constitutional by an Iowa county district court judge in early 2022. 

In early 2024, the U.S. Court of Appeals for the Eighth Circuit reversed.  Animal Legal Defense Fund v. Reynolds, 89 F.4th 1071 (8th Cir. 2024).  The appellate court concluded that while false or deceptive speech is not per se unprotected, Iowa had the constitutional right to bar intentionally false speech that is used to cause a legal harm to someone else or their business.  The Iowa law, the appellate court concluded, focused on the intent to inflict a legally recognizable harm rather than on the content of what was being said.  Accordingly, both the trespass and employment provisions of the law constitutionally barred false statements that result in a harm the law would recognize.  It was the law’s reference to the content of the speech (i.e., false statements) that made the law constitutional.  The intent requirement did not distinguish among speakers based on their viewpoints.  The appellate court succinctly stated that the Iowa law filtered out trespassers who are “relatively innocuous,” and focuses the criminal law on conduct that inflicts greater harms on victims and society.  Thus, the Iowa law was not a viewpoint-based restriction on speech, but was a permissible restriction on intentionally false speech undertaken to accomplish a legally cognizable harm. 

Kansas and the Tenth Circuit.  In Animal Legal Defense Fund, et al. v. Kelly, 9 F.4th 1219 (10th Cir. 2021), pet. for cert. filed, (U.S. Sup. Ct. Nov. 17, 2021), the court construed the Kansas provision that makes it a crime to take pictures or record videos at a covered facility “without the effective consent of the owner and with the intent to damage the enterprise.”  The plaintiffs claimed that the law violated their First Amendment free speech rights.  The State claimed that what was being barred was conduct rather than speech and that, therefore, the First Amendment didn’t apply.  But, the court tied conduct together with speech to find a constitutional violation – it was necessary to lie to gain access to a covered facility and consent to film activities.  As such, the law regulated protected speech (lying with intent to cause harm to a business) and was unconstitutional.  The court determined that the State failed to prove that the law narrowly tailored to a compelling state interest in suppressing the “speech” involved.  The dissent pointed out (correctly and consistently with the Eighth Circuit) that “lies uttered to obtain consent to enter the premises of an agricultural facility are not protected speech.” The First Amendment does not protect a fraudulently obtained consent to enter someone else’s property. 

Note:  On April 25, 2022, the U.S. Supreme Court declined to hear the case.  Kelly v. Animal Legal Defense Fund, cert. den., 142 S. Ct. 2647 (2022). 

As a result of the Eighth Circuit’s opinion in Reynolds in early 2024, legislation was introduced into the Kansas Senate that would amend the Farm Animal and Field Crop Act and Research Facilities Protection Act.  Among other things, the legislation would criminalize the making of false statements on an employment application to gain access to an animal facility.  The legislation stalled in the Senate.  Identical legislation was introduced into the Kansas House. 

A Different Approach?

The appellate courts generally holding (except for the Eighth Circuit) that the right to free speech protects false factual statements that inflict real harm and serve no legitimate interest runs contrary to an established line of U.S. Supreme Court precedent, at least until the Court’s decision in United States v. Alvarez, 567 U.S. 709 (2012).  See, e.g., Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983); Brown v. Hartlage, 456 U.S. 45 (1982); Herbert v. Lando, 441 U.S. 153 (1979); Garrison v. Louisiana, 379 U.S. 64 (1964).  The current split between the Eighth, Ninth and Tenth Circuits on the constitutionality of the Iowa, Idaho and Kansas laws with respect to the issue of gaining access to a covered facility by lying could warrant a Supreme Court review. 

Indiana trespass law.  Short of a Supreme Court review of a state statute is there another approach that a state might take to provide protection for agricultural livestock facilities?  The state of Indiana’s approach might be the answer.  In 2014, the Indiana legislature passed, and the Governor signed into law the “Indiana Trespass Law.”  Ind. Code 35-43-2-2.  Under the statute, “trespass” is defined as being on a property after being denied entry by the property owner, court order or by a posted sign (or purple paint).  If the trespass involves a dwelling (including an ag operation), the landowner need not deny entry for a trespass to be established.  The law also sets various thresholds for criminal violations. 

Note:  The Iowa Food Operation Trespass Law appears to be similar to the Indiana law.

The Indiana law appears to base property entry on the legal property interest of that of a license.  A license is a term that covers a wide range of permissive land uses which, unless permitted, would be trespasses.  For example, a hunter who is on the premises with permission is a licensee.  The hunter has a license for the limited purpose of hunting only.  If the hunter were to videotape any activity on the premises, that would constitute a trespass as exceeding the scope of the license.  An unlawful entry.  This would be the same result for a farm employee.  Video recording would be outside the scope of employment. By focusing on the property interest of a license and that of a trespass for unauthorized entry, a claim of a possible free speech violation is eliminated.

Hiring Practices

Considering activists that wish to harm animal agriculture, ag animal facilities should utilize common sense steps to minimize potential problems.  Of course, not mistreating animals should always be the standard.  Proper hiring practices are also very important.  A well drafted employment agreement should be used for workers hired to work in an ag animal facility to  help screen potential hires.  The agreement should specify in detail the job requirements and what is not permitted to occur on the premises and inside buildings.  The agreement should give the employer the right to search every employee for devices that could be used to record activities on the farm and in farm buildings.  Also, employee training should be provided and documented.  Also, it’s critical that employee conduct be closely monitored to ensure that employees are acting within the scope of their employment and that animals are being treated appropriately. 

Conclusion

It’s unfortunate that groups exist dedicated to damage and/or eliminate certain aspects of animal agriculture, and that they will use lies and deception to become employed and gain access.  It’s even more frustrating that many of the courts are willing to use the First Amendment as a shield to protect those intending to commit criminal activities to harm animal agriculture.  But, until state laws are drafted in a way that will be found constitutional, the only recourse for livestock operations is to adopt hiring and business practices that will minimize potential harm.

The Eighth Circuit’s decision in Reynolds is refreshing.  It is an important decision for agriculture in general and the confinement livestock industry in particular.  For example, in the Iowa situation, approximately one-third of the nation’s hog production occurs in Iowa. 

February 26, 2024 in Criminal Liabilities, Regulatory Law | Permalink | Comments (0)

Tuesday, February 20, 2024

Dicamba Update

Overview

My blog article of February 11 discussed the Arizona federal district court opinion vacating the registrations of three Dicamba products.  Since then, the EPA made an “existing stocks” ruling that will help some producers through the 2024 growing season.  That makes an update in order.

Updated Dicamba information – it’s the topic of today’s post.

Background

Farmers have used Dicamba for decades on broadleaf plants and, more recently, have used it to control weeds that have become glyphosate-tolerant.  However, until 2016 the use of Dicamba was used only as a pre-emergent herbicide.  It was then that the Environmental Protection Agency (EPA) registered certain low-volatility forms of Dicamba that had a low likelihood of drift problems for over-the-top usage on growing soybean and cotton crops resulting from Dicamba-resistant seeds.  The EPA was sued on the basis that the registration process violated the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) as well as the Endangered Species Act (ESA).  The case became moot by the expiration of the registration, but when the EPA again registered Dicamba for over-the-top use in 2018, a new case was filed.  In 2020, the U.S. Court of Appeals for the Ninth Circuit vacated the registrations for XtendiMax, Engenia and FeXapan.  National Family Farm Coalition v. United States Environmental Protection Agency, 960 F.3d 1120 (9th Cir. 2020).  The court determined that the EPA had failed to follow the procedural rules of the Administrative Procedure Act, the FIFRA and the ESA.  Those statutes require the EPA to provide public notice and a chance for the public to make comments and attend a hearing on the registration issue.  The court also said that the EPA failed to assess risks and costs for non-users of over-the-top Dicamba. 

The EPA again issued another registration for over-the-top Dicamba use for the 2020 and 2021 growing seasons and made further amendments in 2022 and 2023 along with approval for new uses.

2024 Court Decision

On February 6, 2024, a federal district court vacated the registrations of three Dicamba products (XtendiMax, Engenia, and Tavium) that EPA had approved for over-the-top applications.  Center for Biological Diversity v. United States Environmental Protection Agency, No. CV-20-00555-TUC-DCB, 2024 U.S. Dist. LEXIS 20307 (D. Ariz. Feb. 6, 2024).  The decision came at a time when many soybean and cotton farmers have already purchased seed and chemicals and will soon be planting the 2024 crop.  The court said the EPA didn’t follow the notice and comment provisions of the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA) when it issued the registrations and also violated the Administrative Procedure Act (APA) (and the Endangered Species Act) by not allowing public input on whether over-the-top Dicamba has unreasonable adverse effects on the environment. 

The ruling canceled any benefits of planting Dicamba seeds, with the concern that there might not be enough supply of other traits to replace the Dicamba market share.  The immediate impact of the ruling was that it could force farmers to plant Dicamba trait soybeans or cotton without the correct chemical to utilize the gene, resulting in the likely use of alternatives.  Those alternatives could, in turn, magnify the known issues of the Dicamba chemical problems.   

Comment:  While the timing of the court’s decision was awful, the result is good overall in that it held the “feet” of the EPA to the “fire” of the administrative process.  It also raised the question of whether the EPA deliberately violated the public notice and comment procedures that are clearly established in the law.  It’s difficult to believe that the EPA lawyers, particularly after losing in the Ninth Circuit on virtually the same issue in 2020, didn’t know that failing to follow the procedural rules for approving the registrations would lead to the registrations being invalidated. 

EPA reaction.  On February 14, the EPA issued an order to allow existing stocks of XtendiMax, Engenia, and Tavium to be applied directly onto crops so long as the pesticides were “labeled, packaged, and released for shipment” before the court’s decision. The order will allow these products purchased before February 6 to be used this growing season.  The EPA order also provides instructions for how to dispose of unwanted or unused dicamba products.

The Future

What does the future hold for over-the-top Dicamba?  Of course, the EPA could appeal the court’s decision, but any appeal would be to the Ninth Circuit.  Going back to the same court on the same shortcomings as in the 2020 decision probably wouldn’t end well for the EPA.  Perhaps a better idea is for the EPA to re-register over-the-top use of Dicamba by actually following the law’s requirements for providing public notice and comment, and giving the public the opportunity to attend a hearing on the registration.  

February 20, 2024 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Sunday, February 11, 2024

The Big Issues for 2024

Introduction

What are likely to be the most prominent issues in agricultural law and tax in 2024?  I have just finished looking back at 2023 as to what I viewed as the top issues of 2023, so it’s time to take a look forward to what might be the key issues in law and tax that will impact ag producers and the sector as a whole. 

Looking ahead at what might be the biggest issues in ag law and tax in 2024 – it’s the topic of today’s post.

Important “Takings” Case at the Supreme Court

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

What are likely to be the big issues in ag law and tax in 2024?  One involves a case currently at the U.S. Supreme Court with the matter concerning the government’s taking of private property and the requirement under the Fifth Amendment that the government pay for what it takes.  The case involves a Texas farmer and was argued last month.

The family involved in a case has farmed the same land for a century.  There was no problem with flooding until the State renovated a highway and changed the surface water drainage.  In essence, the renovation turned the highway into a dam and when tropical storms occurred, the water no longer drained into the Gulf of Mexico.  Instead, the farm was left flooded for days, destroying crops and killing cattle.  In essence, the farm had been turned into a retention pond. 

The farmer sued the State to get paid for the taking.  Once the case got to federal court, the appellate court dismissed it, saying he couldn’t sue under the Fifth Amendment – only State officials can because Congress hadn’t passed a law saying a private citizen could sue the state.  But the appellate court’s opinion is out-of-step with other court opinions on the issue.  The Fifth Amendment contains a remedy when the government takes your property – you get paid for it. The Constitution matters.

The outcome will be an important one for agriculture. 

Taxing Wealth and the U.S. Supreme Court

Moore v. United States, 36 F.4th 930 (9th Cir. 2022)

This year the U.S. Supreme Court will decide a case on whether the Congress can tax a person’s wealth without a tax realization event such as a sale.  It’s a huge issue for agriculture. 

A case presently before the U.S. Supreme Court involves the question of whether the Congress can tax wealth without a tax realization event.  The taxpayers in the case owned 11 percent of a corporation in India that is more than 50 percent controlled by U.S. persons.  It doesn’t pay dividends but reinvests its earnings into its business of making tools for sale to farmers.  Under the 2017 tax law in the U.S., the company was subjected to a tax that year on its undistributed earnings and profits from 1986 to 2017 which became the obligation of the taxpayers to the extent of their ownership.  They got a $15,000 tax bill from the IRS. 

They sued because they hadn’t sold any stock or done anything to trigger the tax.  They lost and the Supreme Court heard arguments in early December.  If the law is upheld it’s estimated it will bring in $340 billion in revenues.  And it would open the door for the Congress to tax your unrealized gains that could wipe out the stepped-up basis rule at death.  That would be a tough result for many farming operations.

USDA’s “Climate Smart Projects”

Another big issue in 2024 will likely involve the USDA’s attempts to manipulate producers’ behavior by providing taxpayer funding for what it calls “Climate-Smart Agriculture.”  Presently, USDA has poured about $3 billion tax dollars into getting farmers to enroll in projects such as those designed to reduce methane emissions and sequester carbon.  It’s termed the USDA’s “Partnership for Climate Smart Commodities Projects,” and flows from the SEC’s plans that were announced in 2022 to force all publicly traded companies to submit an Environmental, Social, Governance” (ESG) report.  Five months later the USDA’s project was announced.  It’s not just farmers that are on the take.  So far, $90 million has been paid to agricultural giant Archer Daniels Midland; $95 million to the Iowa Soybean Association; and $40 million dollars to Farm Journal.  27 universities have also received various amounts (all in the millions of dollars each). 

But with the funding comes a loss of freedom.  Just ask a Dutch, Polish, Irish, French, German or Sri Lankan farmer how such an agenda has worked for them.  The USDA’s expressed goal is to get farmers and ranchers to calculate greenhouse gas emissions.  In the USDA’s words, “implementation and monitoring of climate smart practices.”  Indeed, USDA has worked with Colorado State University to develop a “planner tool” to be able to measure conservation practices on farms. Pilot projects focused on reducing methane emissions, improving soil quality and carbon sequestration.  Once the emissions from a farm become measurable, they will be regulated.  With regulation comes a loss of freedom and a further loss of smaller farming and ranching operations that are least likely to be able to bear the compliance cost. 

Consumers will also be harmed.  A new study published by the Economic Research Center at the Buckeye Institute finds that, as a result of the USDA’s climate agenda, a typical family of four will have to spend an extra $1,300 annually for food.  This is on top of the double-digit inflation consumers have faced since 2021.  The study also explains that the USDA’s climate agenda will result in much higher costs for diesel, propane, fertilizer and other ag production inputs.  The authors of the study note that, “Federal policymakers are pursuing expensive climate-control and emissions policies that have largely failed in Europe.”  The study can be accessed here:  https://www.buckeyeinstitute.org/library/docLib/2024-02-07-Net-Zero-Climate-Control-Policies-Will-Fail-the-Farm-policy-report.pdf

In 2024, will questions arise concerning the premise underlying the USDA’s efforts?  Also expect further questions to be raised about the funding.  The Ag Secretary says he can use the CCC to fund the climate agenda for agriculture.  Some in Congress don’t agree. 

But one thing’s for sure, the current political climate surrounding agriculture is seeking greater restrictions on farming practices.  That will assuredly increase the cost of farming and make it more difficult for smaller operations to survive.

Farm Bill Developments

An issue on the radar in ag law and tax in 2024 will be the continued discussions about a new Farm Bill.  The 2018 Farm Bill is set to expire at the end of September.  Cost will be an issue.  The CBO projects that continuing the current Farm Bill for ten years would cost more than $1.4 trillion with 84 percent of that going into nutrition programs.  Given increasing budget deficits, the debt ceiling and budget battles, the cost of the Farm Bill will be a big discussion point in 2024. 

Crop reference prices will be on the table as will whether nutrition spending should be meshed with farm income and ag conservation.  Other key issues will likely involve the amount of crop insurance premium subsidies, the amount of acreage in the CRP and eligibility for SNAP benefits. 

All of this depends on the political process.  Possibly, the Congress will view the Farm Bill as a way to compromise on a bill critical to rural economies.  Or the opposite could occur, and agreements reached only when they absolutely must be.  If that happens, that will cause uncertainty for markets, consumers, ag retailers and producers in general.

The Farm Bill debate will be an issue to monitor throughout 2024.

SCOTUS on Chevron Deference

Relentless, Inc. v. United States Department of Commerce, 62 F.4th 621 (1st Cir. 2023)

Loper Bright Enterprises v. Raimondo, 45 F.4th 359 (D.C. Cir. 2022)

A big issue in the world of ag law and tax in 2024 will involve the issue of government administrative agency deference. The U.S. Supreme Court is considering two cases involving the issue of how much deference should be given administrative agency rules such as those of the USDA or the EPA, for example. 

The two cases involve whether the National Marine Fisheries Service can require the herring industry to bear the costs of observers on fishing boats who monitor conservation and management practices.  The lower courts simply deferred to the determination of the fishery service that the industry should pay the costs.  That’s the typical outcome – you lose a dispute with the USDA, for example, and once you get to court the court simply defers to the agency unless the agency was completely out of bounds with its interpretation of the law.  If the agency’s interpretation was reasonable, the agency wins.  That’s the standard the Court established in 1984 in its Chevron decision. 

In 2022, the Supreme Court limited the deferential standard (it completely ignored Chevron in another 2022 case) when a question of national economic policy is involved, but now the court has an opportunity to lower the deferential standard on a broader scope.  If it does, farmers and ranchers may have better luck in disputes with government agencies and be able to more frequently overcome the presumption that the government is almost always right when Congress hasn’t written a clear statute.

Court Vacates Dicamba Registrations

Center for Biological Diversity v. United States Environmental Protection Agency, No. CV-20-00555-TUC-DCB, 2024 U.S. Dist. LEXIS 20307 (D. Ariz. Feb. 6, 2024)

Recently, a federal court vacated the registrations of three Dicamba products that EPA had approved for over-the-top applications.  The decision comes at a time when many soybean and cotton farmers have already purchased seed and chemicals and will soon be planting the 2024 crop. 

The court said the EPA didn’t follow the notice and comment provisions of the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA) when it issued the registrations and also violated the Administrative Procedure Act (APA) (and the Endangered Species Act) by not allowing public input on whether over-the-top Dicamba has unreasonable adverse effects on the environment. 

In 2020 a federal appellate court vacated the registrations finding that the EPA failed to assess risks and costs for non-users of over-the-top Dicamba.  National Family Farm Coalition v. United States Environmental Protection Agency, 960 F.3d 1120 (9th Cir. 2020).  The EPA made amendments in 2022 and 2023 and approved new uses which the court has now said were approved improperly.

The ruling cancels any benefits of planting Dicamba seeds, and there may not be enough supply of other traits to replace the Dicamba market share.  If farmers are forced to plant Dicamba trait soybeans or cotton without the correct chemical to utilize the gene, they will likely use alternatives that will, in turn, magnify the known issues of the Dicamba chemical problems.   

Comment:  While the timing of the court’s decision is awful, the result is good overall in that it holds the “feet” of the EPA to the “fire” of the administrative process.  It also raises the question of whether the EPA deliberately violated the public notice and comment procedures that are clearly established in the law.  It’s difficult to believe that the EPA lawyers, particularly after losing in the Ninth Circuit on virtually the same issue in 2020, didn’t know that failing to follow the procedural rules for approving the registrations would lead to the registrations being invalidated. 

Perhaps the judge in the case will stay the ruling until the next crop year to reduce the potential for even more harm from a herbicide that should never have been allowed to be used. 

Certainly, this issue will be one that stays on the “front burner” for some time. 

Conclusion

That’s what I see as being the biggest issues in law and tax facing agriculture in 2024.  Only time will tell, but I suspect some of these will end up on my 2024 “Top Ten” list next January.

February 11, 2024 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Saturday, January 27, 2024

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

Overview

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

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

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

Background

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

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

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

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

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

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

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

State Enactments in 2023

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

Tuesday, January 23, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part Five): California’s Proposition 12 and the U.S. Supreme Court

Overview

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

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

That brings me to the third most important development in ag law and tax of 2023 – it’s the topic of today’s post.

California’s Proposition 12 at the U.S. Supreme Court

North American Meat Institute v. Bonta, 141 S. Ct. 2854 (2021)

In a huge blow to pork producers (and consumers of pork products) nationwide, the Supreme Court of the United States (Court) upheld California’s Proposition 12 against a constitutional challenge.  Proposition 12 requires any pork sold in California to be raised in accordance with California’s housing requirements for hogs.  This means that U.S. hog producers must ensure that their production facilities satisfy California’s requirements for the resulting pork products to be sold to California consumers.

Involved in the case was a claim involving the judicially created doctrine known as the “dormant Commerce Clause.”  A bit of background is in order.

The Commerce Clause.  Article I Section 8 of the U.S. Constitution provides in part, “the Congress shall have Power...To regulate Commerce with foreign Nations and among the several states, and with the Indian Tribes.”  The Commerce Clause, on its face, does not impose any restrictions on states in the absence of congressional action.  However, the U.S. Supreme Court has interpreted the Commerce Clause as implicitly preempting state laws that regulate commerce in a manner that disrupts the national economy.  This is the judicially created doctrine known as the “dormant” Commerce Clause. 

The “dormant” Commerce Clause.  The dormant Commerce Clause is a constitutional law doctrine (that is not in the text of the Constitution) that says Congress's power to "regulate Commerce ... among the several States" implicitly restricts state power over the same area.  In general, the Commerce Clause places two main restrictions on state power – (1) Congress can preempt state law merely by exercising its Commerce Clause power by means of the Supremacy Clause of Article VI, Clause 2 of the Constitution; and (2) the Commerce Clause itself--absent action by Congress--restricts state power.  In other words, the grant of federal power implies a corresponding restriction of state power.  This second limitation has come to be known as the "dormant" Commerce Clause because it restricts state power even though Congress's commerce power lies dormant. Willson v. Black Bird Creek Marsh Co., 27 U.S. 245 (1829).  The label of “dormant Commerce Clause” is really not accurate – the doctrine applies when the Congress is dormant, not the Commerce Clause itself.

The rationale behind the Commerce Clause is to protect the national economic market from opportunistic behavior by the states - to identify protectionist actions by state governments that are hostile to other states.  Generally, the dormant Commerce Clause doctrine prohibits states from unduly interfering with interstate commerce.  State regulations cannot intentionally discriminate against interstate commerce.  If they do, the regulations are per se invalid.  See, e.g., City of Philadelphia v. New Jersey, 437 U.S. 617 (1978).  Also, state regulations cannot impose undue burdens on interstate commerce.  See, e.g., Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981).  Under the “undue burden” test, state laws that regulate evenhandedly to effectuate a local public interest are upheld unless the burden imposed on commerce is clearly excessive in relation to the local benefits.     

The Court has never held that discrimination between in-state and out-of-state commerce, without more, violates the dormant Commerce Clause.  Instead, the Court has explained that the dormant Commerce Clause is concerned with state laws that both discriminate between in-state and out-of-state actors that compete with one another, and harm the welfare of the national economy.  Thus, a discriminatory state law that harms the national economy is permissible if in-state and out-of-state commerce do not compete.  See, e.g., General Motors Corp. v. Tracy, 117 S. Ct. 811, 824-26 (1997).  Conversely, a state law that discriminates between in-state and out-of-state competitors is permissible if it does not harm the national economy. H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949). 

Proposition 12.  In 2018, California voters passed Proposition 12.  Proposition 12 bans the sale of whole pork meat (no matter where produced) from animals confined in a manner inconsistent with California’s regulatory standards.  Proposition 12 established minimum requirements on farmers to provide more space for egg-laying hens, breeding pigs, and calves raised for veal. Specifically, the law requires that covered animals be housed in confinement systems that comply with specific standards for freedom of movement, cage-free design, and minimum floor space. The law identifies covered animals to include veal calves, breeding pigs and egg-laying hens. The implementing regulations prohibit a farm owner or operator from knowingly causing any covered animal to be confined in a cruel manner, as specified, and prohibits a business owner or operator from knowingly engaging in the sale within the state of shell eggs, liquid eggs, whole pork meat or whole veal meat, as defined, from animals housed in a “cruel manner.”  In addition to general requirements that prohibit animals from being confined in a manner that prevents lying down, standing up, fully extending limbs, or turning around freely, the measure added detailed confinement space standards for farms subject to the law. The alleged reason for the law was to protect the health and safety of California consumers and decrease the risk of foodborne illness and the negative fiscal impact on California. 

In late 2019, several national farm organizations challenged Proposition 12 and sought a declaratory judgment that the law was unconstitutional under the dormant Commerce Clause.  The plaintiffs also sought a permanent injunction preventing Proposition 12 from taking effect.  The plaintiffs claimed that Proposition 12 impermissibly regulated out-of-state conduct by compelling non-California producers to change their operations to meet California’s standards.  The plaintiffs also alleged that Proposition 12 imposed excessive burdens on interstate commerce without advancing any legitimate local interest by significantly increasing operation costs without any connection to human health or foodborne illness.  The trial court dismissed the plaintiffs’ complaint.  National Pork Producers Council, et al. v. Ross, 456 F. Supp. 3d 1201 (S.D. Cal. 2020). 

On appeal, the plaintiffs focused their argument on the allegation that Proposition 12 has an impermissible extraterritorial effect of regulating prices in other states and, as such, is per se unconstitutional.  This was a tactical mistake for the plaintiffs.  The appellate court noted that existing Supreme Court precedent on the extraterritorial principle applied only to state laws that are “price control or price affirmation statutes.”  National Pork Producers Council, et al. v. Ross, 6 F.4th 1021 (9th Cir. 2021).  Thus, the extraterritorial principle does not apply to a state law that does not dictate the price of a product and does not tie the price of its in-state products to out-of-state prices.  Because Proposition 12 was neither a price control nor a price-affirmation statute (it didn’t dictate the price of pork products or tie the price of pork products sold in California to out-of-state prices) the law didn’t have the extraterritorial effect of regulating prices in other states. 

The appellate court likewise rejected the plaintiffs’ claim that Proposition 12 has an impermissible indirect “practical effect” on how pork is produced and sold outside California.  Id.  Upstream effects (e.g., higher production costs in other states) the appellate court concluded, do not violate the dormant Commerce Clause.   The appellate court pointed out that a state law is not impermissibly extraterritorial unless it regulates conduct that is wholly out of state.  Id.  Because Proposition 12 applied to California and non-California pork production the higher cost of production was not an impermissible effect on interstate commerce.

The appellate court also concluded that inconsistent regulation from state-to-state was permissible because the plaintiffs had failed to show a compelling need for national uniformity in regulation at the state level.  Id.  In addition, the appellate court noted that the plaintiffs had not alleged that Proposition 12 had a discriminatory effect on interstate commerce. 

Simply put, the appellate court rejected the plaintiffs’ challenge to Proposition 12 because a law that increases compliance costs (projected at a 9.2 percent increase in production costs that would be passed on to consumers) is not a substantial burden on interstate commerce in violation of the dormant Commerce Clause. 

U.S. Supreme Court

On May 11, 2023, the Court issued a 5-4 plurality opinion dismissing the case for failure to state a claim.  While the Court did not address the merits of the case, the Court did issue a total of five opinions (including a dissent) that can provide guidance for future cases alleging a dormant commerce clause violation. 

Plurality opinion.  The controlling plurality opinion (Justices Gorsuch, Thomas, Barrett, Sotomayor and Kagan) pointed out that the Congress has the power to regulate interstate commerce (Article I, Section 8), but hadn’t enacted any statute that would displace Proposition 12.  So, the Court noted, the pork producers were claiming that the dormant Commerce Clause should be utilized to negate Proposition 12.  As noted, the pork producers didn’t allege any purposeful discrimination by California, instead relying on the “extraterritoriality doctrine,” with the result that, because price discrimination was not involved, the Court rejected adopting a “per se” rule under the dormant Commerce Clause that would strike down state legislation that only has an impact beyond that state’s borders.  Indeed, the Court said, “This argument falters out of the gate.” 

The fallback argument of balancing under Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) was rejected by Justices Gorsuch, Thomas and Barrett on the basis that balancing state interests was a policy decision to be left up to the Congress. 

Note:  In Pike, the Court held that the power of the states to enact laws that interfere with interstate commerce is limited when the law poses and undue burden on business transactions.  “Undue burden is to be determined based on a balancing test which depends on the facts of each particular situation.

Indeed, Justice Barrett concluded that the benefits and burdens of Proposition 12 were impossible to measure, but that the complaint plausibly alleged a substantial burden on interstate commerce that would be felt almost exclusively outside California.  Justices Sotomayor and Kagan would have engaged in balancing but because the pork producers failed to plausibly allege a substantial burden on interstate commerce (which is a requirement under Pike), the Court said it had no way to weigh the costs of Proposition 12 against California’s “moral and health interests.”  Again, the Court said the matter was a policy choice to be left up to the Congress and that the Commerce Clause does not protect a particular structure or method of business operation – “That goes for pigs no less than gas stations.” 

Dissenting opinion.  Chief Justice Roberts wrote a dissenting opinion that was joined by Justices Alito, Kavanaugh and Jackson.  The dissent concluded that a substantial burden on interstate commerce was present because Proposition 12 impacted practically the entire U.S. hog industry due to the interconnected nature of the nationwide pork industry which would require the compliance of the vast majority of hog producers.  It was more than a cost of compliance issue.  The question was then, in the words of the dissent, whether the burden of Proposition 12 was clearly excessive in relation to the “putative local benefits.”  This determination needed to be made by the lower courts, the dissent argued.

Separate opinion.  Justice Kavanaugh wrote separately to point out that California was regulating hog production in other states and that other states had good reason for allowing hogs to be raised in a manner the California found offensive.  He also noted that it would be virtually impossible for hog farmers and pork processors to segregate individual hogs based on their ultimate destination, and that each state has its own rules for health and safety as applied to hog production.  Justice Kavanaugh stated, “California’s approach undermines federalism and the authority of individual States by forcing individuals and businesses in one State to conduct their farming, manufacturing and production practices in a manner required by the laws of a different State.”  If Proposition 12 were to be upheld, a “blueprint” could be provided for other states.  Justice Kavanaugh also stated that California’s approach could also be challenged under the Privileges and Immunities Clause, the Import-Export Clause and the Full Faith and Credit Clause.  He concluded with a biting criticism of the lawyers for the pork producers by stating, “It appears, therefore, that properly pled dormant Commerce Clause challenges under Pike to laws like California’s Proposition 12 (or even to Proposition 12 itself) could succeed in the future – or at least survive past the motion-to-dismiss stage.”

Conclusion

Historically, the Court has been careless in applying the anti-discrimination test, and in many cases, neither of the two requirements--interstate competition or harm to the national economy--is ever mentioned.  See, e.g., Hughes v. Oklahoma, 441 U.S. 322 (1979). The reason interstate competition goes unstated is obvious – in most cases the in-state and out-of-state actors compete in the same market.  But, the reason that the second requirement, harm to the national economy, goes unstated is because the Court simply assumes the issue away.

Implications.  The dormant Commerce Clause is something to watch for in court opinions involving agriculture.  As states enact legislation designed to protect the economic interests of agricultural producers in their states, those opposed to such laws could challenge them on dormant Commerce Clause grounds.  But such cases must be plead carefully to show an impermissible regulation of extraterritorial conduct. 

In the present case, practically doubling the cost of creating hog barns to comply with the California standards was not enough, nor was the interconnected nature of the pork industry.  California gets to call the shots concerning the manner of U.S. pork production for pork marketed in the state.  This, despite overarching federal food, health and safety regulations that address California’s purported rationale for Proposition 12.

Clearly a majority of the Justices said such matters as Proposition 12 is up to the Congress.  On that point, since 2015 legislation has been introduced in the U.S. House on multiple occasions to address interstate commerce cannibalization by a state.  On two occasions, the legislation passed the House but only to die in the U.S. Senate and not get included in a Farm Bill.  The legislation, was entitled the “Protect Interstate Commerce Act” and would have barred a state from imposing a standard or condition on the production or manufacture of agricultural products sold or offered for sale in interstate commerce if (1) the production or manufacture occurs in another state, and (2) the standard or condition adds to standards or conditions applicable under Federal law and the laws of the state in which the production or manufacture occurs. More recently, the legislation was later introduced in the U.S. Senate under a different title.    

Note:  Certainly, congressional action can resolve questions about the constitutionality of agricultural regulations under the Commerce Clause.  For example, a Vermont “genetically modified organism” labelling law was challenged through litigation, but Congress reached a nationwide solution by creating a uniform national standard.  In the current situation, The Congress could set a specific standard for cage sizes that preempts state laws or, as the proposed legislation attempts, set a general rule for state regulation of products in interstate commerce.

The dormant commerce clause is one of those legal theories “floating” around out there that can have a real impact in the lives of farmers, ranchers and consumers, and how economic activity is conducted.  But a case challenging a state law on dormant Commerce Clause grounds must be plead and argued properly for a court to hear it.  That didn’t happen in the present situation. 

January 23, 2024 in Regulatory Law | Permalink | Comments (0)

Friday, January 19, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part Three)

Overview

Today’s article is third in a series concerning the Top Ten ag law and tax developments of 2023.  So far, I’ve looked at a court-ordered removal of an entire wind farm, the reporting of foreign bank accounts, new business information reporting requirements, a massive “renewable” fuel tax scam, and a significant Tax Court case concerning self-employment tax on distributions to limited partners.  That brings me to the remaining ‘top five’ developments in today’s post. 

Development number 5 – it’s the topic of today’s post. 

  1. Corps of Engineers Mismanages Water Levels in Missouri River

Ideker Farms, Inc. et al. v. United States, 71 F.4 th 964 (Fed. Cir. 2023), afn'g. in part, vacn'g. in part and remanding, 151 Fed Cl. 560 (Fed. Cl. 2020).

In 2023, the U.S. Court of Appeals for the Federal Circuit largely affirming a lower court ruling that the U.S. Army Corps of Engineers (COE) unconstitutionally violated the property rights of certain farmers along the Missouri River.  The case stemmed from changed in the COE’s manual for managing waters levels in the river.  The court’s decision is not only very important for the particular farmer’s involved but is also an important victory for private property rights in general.

Background facts.  In 2014, almost 400 farmers along the Missouri River from Kansas to North Dakota sued the federal government claiming that the actions of the U.S. Army Corps of Engineers (COE) led to and caused repeated flooding of their farmland along the Missouri River.  The farmers alleged that flooding in 2007-2008, 2010-2011, and 2013-2014 constituted a taking requiring that compensation be paid to them under the Fifth Amendment.  The litigation was divided into two phases – liability and compensation for an unconstitutional taking of theirs farms. 

The liability phase was decided in early 2018 when the court determined that some of the 44 landowners selected as bellwether plaintiffs had established the COE’s liability.  In that decision, the court held that the COE, in its attempt to balance flood control and its responsibilities under the Endangered Species Act, had released water from reservoirs “during periods of high river flows with the knowledge that flooding was taking place or likely to soon occur.”  The court, in that case, noted that the COE had made changes to its “Master Manual” in 2004 and made other changes after 2004 to reengineer the Missouri River and reestablish more “natural environments” to facilitate species recovery.  Those changes led to unprecedented releases from Gavins Point Dam in South Dakota after heavy spring rains and snowmelt in Montana during early 2011.  The large volume of water released caused riverbank destabilization which led to flooding and destroyed all of the levees along the lead plaintiff’s farm and an estimated $2 billion in damages.  The COE claimed it acted appropriately to manage the excess water.  Ultimately, the court, in the earlier litigation, determined that 28 of the 44 landowners had proven the elements of a takings claim – causation, foreseeability and severity.  The claims of the other 16 landowners were dismissed for failure to prove causation. The court also determined that flooding in 2011 could not be tied to the COE’s actions and dismissed the claims for that year. 

Damages.  Subsequent litigation involved a determination of the plaintiffs’ losses and whether the federal government had a viable defense against the plaintiffs’ claims.  The trial court found that the “increased frequency, severity, and duration of flooding post MRRP [Missouri River Recovery Program] changed the character of the representative tracts of land.”  The trial court also stated that, “ [i]t cannot be the case that land that experiences a new and ongoing pattern of increased flooding does not undergo a change in character.”  The trial court determined that three representative plaintiffs, farming operations in northwest Missouri, southwest Iowa and northeast Kansas, were collectively owed more than $10 million for the devaluation of their land due to the establishment of a “permanent flowage easement” that the COE acquired along with repairs to a levee.  The easement and levee damage constituted a compensable taking under the Fifth Amendment.  However, the trial court determined that the COE need not compensate the plaintiffs for property and crop losses, and that flooding from 2011 was not compensable. The impact of the trial court’s ruling meant that hundreds of landowners affected by flooding in six states would likely be entitled to compensation for the loss of property value due to the new flood patterns that the COE created as part of its MRRP. Both parties appealed.  The Corps claimed that the trial court lacked jurisdiction and that the plaintiffs’ claims accrued in 2007.  As such those claims, the COE argued, were barred by a six-year statute of limitations. The Corps also claimed the trial court’s December 31, 2014, accrual date was arbitrary. The Federal Circuit rejected both arguments.

Appellate decision.  The appellate court determined that the plaintiffs’ claims were not time-barred and that the accrual date of December 31, 2014, was not arbitrary.  The appellate court affirmed on the compensable taking issue but determined that the trial court erred by excluding crop damages occurring between 2007 and 2014 from the damage calculation.  Thus, the appellate court vacated the trial court determination not to award compensation for crop and property damage for those years and remanded for a determination of the amount of the crop damage to both mature and immature crops. 

The compensable taking was for both a flowage easement and crop damage because the appellate court concluded that a per se taking had occurred – it was foreseeable that the COE’s 2004 changes would cause intermittent flooding into the future.  This meant that the permanent flowage easement was not simply a trespass.  It was a per se taking. The appellate court also determined that the trial court failed to consider whether the actions of the COE actions in accordance with its Master Manual changes increased the severity or duration of the 2011 flooding compared to what was attributable to the record rainfall that year.   

On the damages issue, the appellate court concluded that lost profit and the cost of moving into new facilities are not compensable under the Fifth Amendment, but that destroyed crops are.  Crop damage, both mature and immature must be compensated because they were taken as a direct result of the COE’s permanent flowage easement. The appellate court remanded the case to the trial court to determine the value of the immature crops the COE’s action unconstitutionally took.

Implications.  As noted above, the appellate court held that not only had a Taking occurred, but that the farmers in the case had to be paid for all of the crops that were destroyed over the seven-year period at issue (2007-2014).  The appellate court’s opinion is important for the fact that it establishes that the government must pay for the damages it causes when it floods farmland and destroys crops.  Certainly, the government has the power to “take” property that it wants.  The Constitution ensures that the government pays for what it takes.  That principle was appropriately applied in this instance. 

January 19, 2024 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Friday, January 12, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part One)

Overview

With my two prior blog articles I started looking at some of the most significant developments in agricultural law and taxation during 2023.  With today’s article I begin the look at what I view as the ten most significant developments in 2023.  These make my Top Ten list because of their significance on a national level to farmers, ranchers, rural landowners and agribusiness in general.

Developments ten through eight of 2023 – that’s the topic of today’s post.

  1. Entire Commercial Wind Development Ordered Removed

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

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

In late 2023, a federal court ordered the removal of an entire commercial wind energy development (150-megawatt) in Oklahoma and set a trial for damages.  The litigation had been ongoing since 2011 and was the longest-running legal battle concerning wind energy in U.S. history.  The ruling follows a 2017 lower court decision concluding that construction of the development constituted “mining” and required a mining lease from a tribal mineral council which the developers failed to acquire.  United States v. Osage Wind, LLC, 871 F.3d 1078 (10th Cir. 2017).  The court’s ruling granted the United States, the Osage Nation and the Osage Minerals Council permanent injunctive relief via “ejectment of the wind turbine farm for continuing trespass.”

The wind energy development includes 84 towers spread across 8,400 acres of the Tallgrass Prairie involving leased surface rights, underground lines, overhead transmission lines, meteorological towers and access roads.  Removal costs are estimated at $300 million.  In 2017, the U.S. Circuit Court of Appeals for the Tenth Circuit held that the wind energy company’s extraction, sorting, crushing and use of minerals as part of its excavation work constituted mineral development that required a federally approved lease.  The company never received one.  The Osage Nation owns the rights to the subsurface minerals that it purchased from the Cherokee Nation in the late 1800s pursuant to the Osage Allotment Act of 1906.  The mineral rights include oil, natural gas and the rocks that were mined and crushed in the process of developing the project. 

In its decision to order removal of the towers, the court weighed several factors but ultimately concluded that the public interest in private entities abiding by the law and respecting government sovereignty and the decision of courts was paramount.  The court pointed out that the defendant’s continued refusal to obtain a lease constituted interference with the sovereignty of the Osage Nation and “is sufficient to constitute irreparable injury.” 

Note:  The lengthy litigation resulting in the court’s decision is representative of the increasing opposition in rural areas to wind energy production grounded in damage to the viewshed, landscape and wildlife.  During 2023, including the court’s opinion in this case, there were 51 restrictions or rejections of wind energy projects and 68 rejections of solar energy projects.  See, Renewable Rejection Database, https://robertbryce.com/renewable-rejection-database/

9.         Reporting Foreign Income

Bittner v. United States, 598 U.S. 85 (2023)

The Bank Secrecy Act of 1970 requires U.S. financial institutions to assist U.S. government agencies in detecting and preventing money laundering by, among other things, maintaining records of cash purchases of negotiable instruments, filing currency transaction reports for cash transactions exceeding $10,000 in a single business day, and reporting suspicious activities that might denote money laundering, tax evasion and other crimes.  The law also requires a U.S. citizen or resident with foreign accounts exceeding $10,000 to report those account to the IRS by filing FinCEN Form 114 (FBAR) by the due date for the federal tax return.  The failure to disclose foreign accounts properly or in a timely manner can result in substantial penalties. 

In this case, the plaintiff was a dual citizen of Romania and the United States.  He emigrated to the United States in 1982, became a U.S. citizen, and lived in the United States until 1990 when he moved back to Romania.  He had various Romania investments amounting to over $70 million.  He had 272 foreign accounts with high balances exceeding $10,000.  He was not aware of the FBAR filing requirement for his non-U.S. accounts until May of 2012.  The initial FBARs that he filed did not accurately report all of his accounts.  In 2013, amended FBARs were filed properly reporting all of his foreign accounts.  The IRS audited and, in 2017, computed the plaintiff’s civil penalties at $2,720,000 for a non-willful violation of failing to timely disclose his 272 foreign account for five years 2007-2011.

The plaintiff denied liability based on a reasonable cause exception.  He also claimed that the penalty under Section 5321 of the Bank Secrecy Act applied based on the failure to file an annual FBAR reporting the foreign accounts, and that the penalty was not to be computed on a per account basis. 

The trial court denied the plaintiff’s reasonable cause defense and held him liable for violations of the Bank Secrecy Act.  The trial court determined that the penalty should be computed on a per form basis and not on a per account basis.  Thus, the trial court computed the penalty at $50,000 ($10,000 per year for five years).  On appeal, the appellate court affirmed on the plaintiff’s liability (i.e., rejected the reasonable cause defense), but determined that the penalty was much higher because it was to be computed on a per account basis. 

On further review, the U.S. Supreme Court (in a 5-4 decision) determined that the penalty was to be computed on a per form basis and not a per account basis.  The Court’s holding effectively reduced the plaintiff’s potential penalty from $2.72 million to $50,000.  The majority relied on the text, IRS guidance, as well as the drafting history of this penalty provision in the Bank Secrecy Act.  The Court did not address the question of where the line is to be drawn between willful and non-willful conduct for FBAR purposes. 

Note:  The Supreme Court’s decision was a major taxpayer victory.  However, the point remains that foreign bank accounts with a balance of at least $10,000 at any point during the year must be reported.  This is an important point for U.S. citizen farmers and ranchers with farming interests in other countries. 

  1. New Corporate Reporting Requirements

            Corporate Transparency Act (CTA), P.L. 116-283

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to report.  Businesses required to file a report are to do so electronically using FinCEN’s filing system obtaining on its BOI e-filing website which is accessible at https://boiefiling.fincen.gov

Note:  On December 22, 2023, FinCEN published a rule that governing access to and protection of beneficial ownership information. Beneficial ownership information reported to FinCEN is to be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. FinCEN states that it will work closely with those authorized to access beneficial ownership information to ensure that they understand their roles and responsibilities in using the reported information only for authorized purposes and handling in a way that protects its security and confidentiality.

Conclusion

I will continue the trek through the “Top Ten” of 2023 in the next post.

January 12, 2024 in Business Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, January 5, 2024

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

Overview

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

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

Scope of the Dealer Trust

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

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

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

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

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

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

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

Equity Theft

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

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

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

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

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

forfeiture procedures.

Customer Loyalty Rewards

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, January 2, 2024

2023 in Review – Ag Law and Tax

Overview

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

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

Labor Disputes in Agriculture

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

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

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

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

Swampbuster

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

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

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

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

Railbanking

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

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

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

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

CAFO Rules

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

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

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

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

Charitable Remainder Annuity Trust Abuse

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

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

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

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

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

Conclusion

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

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

Monday, November 27, 2023

Current Issues in Ag Law and Taxation

Overview

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

Right to Repair

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

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

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

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

Good Husbandry Provisions in Ag Leases

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

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

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

WOTUS Update

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

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

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

Considerations When Buying Farmland

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

The following is a list of some of those factors:

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

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

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

Exclusion of Meals and Lodging from Income

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

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

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

Hobby Losses

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

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

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

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

An S Corporation is a Separate Entity from Yourself

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

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

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

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

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

FBAR Penalties

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

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

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

Conclusion

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

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

Monday, November 13, 2023

Odds and Ends in Ag Law and Tax

Overview

The world of ag law and tax never stops revolving.  That’s probably not always a good thing for farmers and ranchers.  I suspect many involved in agriculture would appreciate less involvement of law and tax in their lives and their business operations.  But it’s the reality which means that it’s important to stay on top of the developments and issues that impact the business bottom line.

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

Scope of Dealer Trust Act at Issue

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

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

In 2021, a Dealer Trust became part of the Packers and Stockyards Act to protect unpaid cash sellers of livestock from the bankruptcy of feeders, brokers and small processors.  The new law puts unpaid cash sellers of livestock ahead of prior perfected security interest holders.  It’s a provision similar to the trust that exists for unpaid cash sellers of grain to a covered grain buyer.  The first case testing the scope of the Dealer Trust Act is winding its way through the courts.

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

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

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

What if the Trump Tax Cuts Aren’t Extended? 

A recent report from economists from Harvard, Princeton, the University of Chicago and the U.S. Treasury have produced a recent report that the Trump tax cuts, particularly the corporate tax reform provisions, created a large surge in business investment, economic growth, higher wagers for workers and little impact on government revenue.  The report can be found here:  https://conference.nber.org/conf_papers/f191672.pdf

The Trump tax cuts (known as the Tax Cuts and Jobs Act (TCJA)) permanently reduced the corporate tax rate from 35 percent to 21 percent and allowed for immediate expensing for shorter-term capital investments (although the provision is currently 80 percent for 2023 and is phasing down).  The economists noted in their report that, “the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2 percent of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions.”  In other words, the economists are saying that when companies reinvest and grow and become more efficient, employee salaries increase, and more taxes get paid.  The result is no net loss to the Treasury over a 10-year period.  The report noted that in 2017, the year before the Trump tax cuts took effect, revenue to the federal government was $3.3 trillion.  In fiscal year 2021 the Treasury took in $4 trillion and $4.9 trillion in fiscal year 2022.  But it dropped to $4.44 trillion in fiscal year 2023 due to the slowing economy burdened by inflationary economic policies. 

Many individual provisions of the TCJA are set to expire at the end of 2025.  For many, this could have a significant impact starting in 2026. Do you have a plan in place if the tax law changes dramatically at that time?  If Congress allows the TCJA to expire, how might it impact you?  For starters, tax rates will increase, and those currently in the 12 percent federal bracket will see a 25 percent increase in their tax rate.  Currently, the 12 percent bracket for married persons filing jointly applies to taxable incomes from $22,000-$89,450.  So, for instance, a married couple with $75,000 of taxable income would see their tax bill raise from $8,560 to approximately $10,350. 

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

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

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

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

You're Responsible for Filing Your Tax Return

Lee v. United States, No. 22-10793, 2023 U.S. App. LEXIS 28228 (11th Cir. Oct. 24, 2023)

The plaintiff’s CPA failed to file the plaintiff’s tax return for three consecutive years, 2014-2016. Ultimately, the plaintiff filed his returns in December of 2018.    In 2019, the IRS assessed the plaintiff with over $70,000 in penalties for violating I.R.C. §6651(a) of the Internal Revenue Code and barred the plaintiff from applying his 2014 overpayment to taxes owed for 2015 and 2016, because as being beyond the statute of limitations in I.R.C. §6511(b).  The CPA informed the IRS that his tax preparation software couldn’t prepare the plaintiff’s returns because of their complexity but didn’t tell the plaintiff of the problem. 

The plaintiff learned about the problem when an IRS agent showed up at his office.  The CPA had failed to update the plaintiff’s address with the IRS.  The plaintiff sued the tax software company and the CPA for negligence and the suit settled in 2020.  The plaintiff sued for a refund of taxes, claiming that his failure to file was due to reasonable cause.  He also sought a refund of penalties.  The trial court ruled for the government based on United States v Boyle, 469 U.S. 241 (1985), where the U.S. Supreme Court applied a bright-line rule that “reliance on an agent,” without more, does not amount to “reasonable cause” for failure to file a tax return on time.  The question in this case was whether the rule in Boyle applies to e-filed returns. 

The appellate court noted that the plaintiff signed Form 8879, authorization to e-file, on time but the CPA failed to electronically transmit the taxpayer's return. In a case of first impression on the issue, the appellate court affirmed.  Here the Circuit Court sided with the IRS and held that the rule applies to e-filed returns and denied the taxpayer's reasonable cause for failure to file argument.  The appellate court determined that for the e-filing was the same as paper filing for the purpose of responsibility for filing the return and that Form 8879 did not make e-filing fundamentally different from paper filing.  The appellate court noted that the plaintiff had not experienced a disability or illness that affected his ability to exercise ordinary care and prudence.  He also did not ask the CPA to provide a copy to him for any of the years in question of the acceptance notice from the software company that his returns had been successfully electronically filed. 

Interest Paid on Late Child Support Is Includible in Payee’s Gross Income 

Rodgers v. Comr., T.C. Memo. 2023-56

The petitioner and her ex-spouse were involved in litigation concerning the termination of the ex-spouse’s child support obligation.  He was found to be arrears in his child support obligation to the extent of $18,000.  That amount was later amended to $16,044.37, which included $10,682.48 of interest.  The arrearage was paid, and the petitioner was issued a 1099-INT showing $7,824 of interest income for 2015.  The plaintiff did not include the interest amount in her income for 2015 and the IRS issued her a deficiency notice.  She took the position that the amount was nontaxable child support. 

The Tax Court noted that under Alabama law the amount for arrearages was specifically designated as interest. As such, the Tax Court upheld the position of the IRS that the amount was taxable interest to the plaintiff.  The Court found the amount to be taxable interest. 

Appraisal Necessary for Non-Cash Donations

Bass v. Comr., T.C. Memo. 2023-41 

 In 2017, the petitioner donated clothing and non-clothing items to the Goodwill and Salvation Army.  He made 173 separate trips to Goodwill and Salvation Army to avoid (at least in his mind) having the items appraised.  For each trip a worker provided him with a donation acknowledgement receipt which he filled out, listing the items donated and their market values.  The Goodwill receipts indicated the donated items were worth $18,837 and the Salvation Army items would worth $11,779.  He attached two Forms 8283 to his tax return but did not obtain a written appraisal, claiming that he didn’t need one because he did not donate any single item worth over $5,000.  Indeed, no single item exceeded $250. 

The Tax Court disagreed, holding that all of the non-cash items had to be aggregated for purposes of whether an appraisal is required.  The Tax Court affirmed the position of the IRS that the petitioner’s charitable deduction should be denied. 

Mortgage Interest Deduction Disallowed

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

In this case, the petitioner claimed a mortgage interest deduction for 2012 associated with a home that his brother purchased for $1,525,000 in 2005.  The purchased was financed with a bank loan.  The brother and his wife were listed as the borrowers on the loan.  The brother (and wife) and another brother also took out a $1,200,000 construction loan.  Both loans were secured by the home.  The construction loan was used to build a separate guest house on the property.  In 2010, one brother executed a quit claim deed in favor of the petitioner with respect to the property. 

During 2012, the petitioner didn’t make any loan payments and was not issued a Form 1098 for the year.  While the petitioner lived in the guest house for part of 2012, he did not list the property as being his place of residence or address.  On his 2012 return, the petitioner claimed a $66,354 deduction for one-half of the total mortgage interest paid for the year as reported on Form 1098 that was issued to his brother and his brother’s wife. 

The IRS disallowed the deduction and the Tax Court agreed.  The petitioner failed to prove that the debt on the property was his obligation, did not show ownership (legal or equitable) in the property, and the quitclaim deed did not convey title to him under state law.  The Tax Court also determined that the petitioner failed to establish that the residence was his “qualified residence.” 

November 13, 2023 in Income Tax, Regulatory Law | Permalink | Comments (0)

Monday, October 30, 2023

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

Introduction

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

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

New Corporate Reporting Requirements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Withdrawing an ERC Claim

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

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

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

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

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

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

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

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

Written Farm Lease Expires by its Terms; No Holdover Tenancy

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

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

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

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

Sunday, October 29, 2023

Ag Law and Tax Topics – Miscellaneous Topics

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

What if TCJA Isn’t Extended?

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

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

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

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

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

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

Buying Farmland with a Growing Crop

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

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

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

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

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

What is Livestock?

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

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

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

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

Partition of Farmland

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

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

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

Crop Insurance Proposal

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

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

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

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

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

Veterinarian’s Lien

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

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

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

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

Digital Assets and Estate Planning

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

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

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

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

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

Conclusion

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

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

Sunday, September 10, 2023

Developments in Ag Law and Ag Tax

Overview

In recent weeks, a number of important and interesting developments have occurred in the realm of agricultural law and taxation.  The subjects include various tax issues; oil and gas; state taxation issues; IRS information; and farm program payments.

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

Revised Form I-9

Form I-9 is an important document for ag employers hiring workers.  It verifies the identity and employment authorization of farm employees and protects the employer from penalties associated with improper hires.  A new version of the Form became available on August 1 and it’s this version that must be used starting November 1.   

All U.S. employers must ensure proper completion of Form I-9 for each individual hired, and whether the employment involves citizens or noncitizens. While agriculture is often treated differently under the law in many situations, that’s not the case when it comes to Form I-9.  There is no exception based on size of the farming operation or for family owned farming businesses.

The Form applies to employment situations.  It doesn’t apply when a farmer hires custom work or work to be done as an independent contractor.

A revised version of Form I-9 became available on August 1.  The Form has been condensed in some instances and it clarifies the difference between “noncitizen national” and “noncitizen authorized to work.”  Also, the revised Form can be filled out on tablets and mobile devices, and a checkbox has been added for employers to indicate when they have remotely examined Form I-9 documents.  Certain other revisions have been made and the Instructions for the Form have also been updated. 

Both employees and employers must complete the Form within three days of the hire.  Employers must retain the Form and make it available for inspection. 

You can access the new version here:  https://www.uscis.gov/sites/default/files/document/forms/i-9.pdf  The government’s summary of the revised Form is here:  https://www.uscis.gov/sites/default/files/document/fact-sheets/FormI9SummaryofChangesFactSheet.pdf

Florida Foreign Ownership Law in Effect – Injunction Denied

Ownership of U.S. land, specifically agricultural lands, by foreign persons or entities has been an issue that traces to the origins of the United States. Today, approximately fourteen states specifically forbid or limit nonresident aliens, foreign businesses and corporations, and foreign governments from acquiring or owning an interest in agricultural land within their state. Although these states have instituted restrictions, each state has taken its own approach. In other words, a uniform approach to restricting foreign ownership has not been established because state laws vary widely.

Currently, the following states restrict (in one fashion or another) foreign ownership of agricultural land.  about one-half of the states restrict agricultural land acquisition by aliens.  AL, AR, FL, HI, ID, IN, IA, KS, KY, LA, MN, MS, MO, MT, NE, ND, OH, OK, PA, SC, SD, TN, UT, VA, WI,   

The states with the most restrictive laws are IA, KY, MN, MO, NE, ND, OK, SD and WI.  The other 16 states have minor restrictions on foreign ownership of agricultural land. 

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

The Florida provision limits landownership rights of certain noncitizens that are domiciled either in China or other countries that are a “foreign country of concern.”  Fla. Stat. §§692.201-.204.   The countries considered as a FCOC under the law include China; Russia; Iran; North Korea; Cuba; Venezuela’s Nicolás Maduro regime; and Syria. Four Chinese citizens living in Florida, along with a real estate brokerage firm, claimed that the law violated their equal protection rights because it restricts their ability to purchase real property due to their race. They also claimed that the law violated the Due Process Clause and the Supremacy Clause of the Constitution and the Fair Housing Act (FHA). Under the law, Chinese investors that are not U.S. citizens that hold or acquire and interest in real property in Florida on or after July 1, 2023, must report their interests to the state or be potentially fined $1,000 per day the report is late.  Chinese acquisitions after July 1, 2023, are subject to forfeiture to the state with such acquisitions constituting a third-degree felony.  The seller commits a first-degree misdemeanor for knowingly violating the law.

The plaintiffs sought an injunction against the implementation of the law before it went into effect on July 1, 2023.  However, the law went into effect on July 1, with the litigation pending.

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

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

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

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

USDA Payments Nontaxable?

Partisan legislation has been introduced into the U.S. House (no bill number yet) that would make numerous farm program benefits nontaxable.  Identical legislation was introduced into the Senate in late 2022.  The law, known as The Family Farmer and Rancher Tax Fairness Act of 2023, would make payments to “distressed” borrowers tax-free, as well as certain payments to “underserved” farmers in high poverty areas and payments to farmers that have allegedly been discriminated against by the USDA. Specifically, the payments covered by the bill are defined as any payment described in section 1066(e) of the American Rescue Plan Act of 2021 (as amended by section 22007 of Public Law 117–169) or section 22006 of Public Law 117–169.  It should be noted that none of the USDA program payments that the bill makes nontaxable are associated with the virus.  While the bill could end up being included in the Farm Bill (which will likely not be passed this year).  However, the bill makes little tax or economic sense (it would create perverse economic incentives) and will likely face stiff opposition. 

Conclusion

These are just a few recent developments in the world of ag law and tax.  More will be forthcoming in another post.

September 10, 2023 in Income Tax, Regulatory Law | Permalink | Comments (0)

Monday, August 21, 2023

Current Developments and Issues in Agricultural Law and Taxation

Overview

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

Adverse Possession/Prescriptive Easement

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

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

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

Here's a summary of the case:

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

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

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

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

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

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

Texas Adverse Possession Case

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

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

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

Grain Storage Costs

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

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

Update on Proposition 12 Fallout (the EATS Act)

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

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

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

Wednesday, July 12, 2023

Recent Happening in Ag Law and the Courts

Overview

The field of agricultural law is broad and dynamic.  There is always something happening.  That’s a function of the many varied ways that the law intersects with land ownership, land use, economics and the production of food and fiber.  Below is my commentary on a few recent cases involving farmers and ranchers – farm bankruptcy; veterinarian’s lien; confined animal feeding operations and an injury sustained while assisting a downed heifer.

Some recent court cases involving ag – it’s the topic of today’s post.

Chapter 12 Plan Could Be Modified – Substantial Change in Circumstances Must be Shown

In re Swackhammer, 650 B.R. 914 (Bankr. S.D. Iowa 2023)

Chapter 12 bankruptcy is exclusively for family farmers.  A creature of the farm crisis of the 1980s, it became a permanent part of the bankruptcy code in 2005.  A key feature is the ability to restructure debt and put together a reorganization plan that allows the farm debtor to pay off creditors over time.  But a significant question is whether that reorganization plan can be modified and, if so, how many times it can be modified.  A recent case shed some light on those questions. 

In Swackhammer, the debtors filed Chapter 12 bankruptcy in 2018, and a second modified plan was confirmed in 2019.  In 2020, the debtors move to modify their confirmed plan to extend the time to make payments to secured creditors based on changed circumstances such as weather, equipment failure, employee illness or losses due to delayed financing.  Each time the creditors objected, but each time the court allowed the modification.  In 2022, the debtors motioned to approve a third modified plan to extend the deadline for payments to creditors because of unforeseen revenue loss from the 2021 crops.  The debtors, for the first time, claimed that nothing in 11 U.S.C. §1229 required them to prove changed circumstances.  The creditors objected, claiming that the court had plenty of evidence that none of the debtors’ plans were feasible.  The creditors also asserted that the debtors had to prove that their revenue loss was due to a substantial and unanticipated change in circumstances.  The creditors motioned to dismiss the debtors’ Chapter 12 case. 

The bankruptcy court directed the parties to discuss whether they could agree to the terms of a fourth modified plan.  Ultimately, a fourth modified plan was approved with the bankruptcy court noting that this would be the last modification allowed.  A secured creditor appealed on the basis that 11 U.S.C. §1229 required a debtor to show “unanticipated, substantial change in circumstances” before confirming a proposed modified plan.  The appellate court noted that the circuit courts of appeal were split on the issue and that it had not yet addressed the issue.  The appellate court held that 11 U.S.C. §1229(a) requires a showing, at a minimum of a “substantial change in circumstances” but that it didn’t need to take a position on the issue in the case because the evidence illustrated that the debtors had met the burden.  Accordingly, the bankruptcy court had not erred in allowing the fourth modification because, in any event, the evidence showed an unanticipated substantial change in circumstances. 

Veterinarian’s Lien Fails for Lack of Proof. 

In re Kern, No. 22-40437-12, 2023 Bankr. LEXIS 1392 (Bankr. D. Kan. May 26, 2023)

Every state has numerous statutory liens that, when properly “perfected” can beat out a prior perfected secured lien.  Common ones include a mechanic’s lien, an agister’s lien, and a landlord’s lien.  Some states, including Kansas, also have a statutory veterinarian’s lien.  That lien was at issue in a recent case.

In In re Kern, the debtor had pastured cattle for third parties until February of 2022.  During that time, a veterinarian provided medications and veterinary care for the cattle.  After shipping the cattle at the direction of the owner, the third party’s check was dishonored, and the debtor couldn’t pay the veterinary bill.  Ultimately, the veterinarian came into possession of some of the debtor’s cattle and the veterinarian cared for the cattle for slightly over two months.  It was unclear and disputed how the veterinarian came into possession of the cattle.  The veterinarian filed a veterinary lien under Kan. Stat. Ann. §47-836 with the local county Register of Deeds and a copy of the lien from mailed to the debtor and printed in the local newspaper.  The debtor’s primary lender then intervened, claiming a first-priority lien on the cattle.  The county Sheriff sold the cattle for $18,714.83.  That amount was deposited with the county court. 

The veterinarian then sought payment pursuant to the lien, and the primary lender objected.  The debtor then filed Chapter 12 bankruptcy.  The parties stipulated that the primary lender held a valid perfected lien in the cattle and cattle proceeds, that could be beat out by a valid veterinarian’s lien.  The debtor claimed that he didn’t request veterinary services for the cattle, but that the cattle owner must have.  Ultimately, the court concluded that the veterinarian could only establish that someone with lawful possession of the cattle delivered them to him for veterinary services, but that it couldn’t be established that it was the debtor.  Thus, the veterinarian couldn’t establish it was the debtor that requested his services and the veterinarian failed to meet his burden of proof by a preponderance of the evidence and the veterinarian’s lien was invalid. 

Court Vacates Medium-Sized CAFO Rule

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

The plaintiff, a non-profit organization that was initially formed during the farm debt crisis of the 1980s to provide various forms of assistance to smaller-sized family farming operations, acting on behalf of various farm and animal rights groups, challenged a rule promulgated by the Farm Service Agency (FSA) in 2016.  That rule exempted medium-sized confined animal farming operations (CAFOs) from environmental review for FSA loans.  A medium-sized CAFO can house up to 700 dairy cows, 2,500 55-pound hogs or up to 125,000 chickens.  The plaintiff challenged the rule as being implemented without complying with the National Environmental Policy Act (NEPA) [42 U.S.C. §4332(2)(C)] which requires all federal agencies to undertake a certain degree of environmental review before effecting an agency decision or policy.  In addition, the NEPA specifies that “an agency will inform the public that it has indeed considered environmental concerns in its decision-making process.”  Alternative, an agency can provide an environmental impact statement (EIS).  An EIS requires agency review before any action is taken that will “significantly affect the quality of the human environment.”  Another alternative is for an agency to prepare an “environmental assessment” (EA) when environmental impact is not clearly established, an EIS is not necessary and there will not be any significant environmental impact.  But, no analysis need be made public is the agency determines that its proposed action will not individually or cumulatively have a significant effect on the human environment.  The FSA concluded that it didn’t need to do any environmental analysis before making loans to medium-sized CAFOs, categorically exempting them from NEPA review.  The court disagreed and vacated the rule.  The court noted that FSA had provided no rationale for the exemption or the data upon which it relied except a 2013 discussion of a proposed categorical exemption.  FSA conceded that it made no finding as to environmental impact.  The court determined that to be fatal, along with providing no notice that it was going to categorically exempt all loan actions to medium-sized CAFOs.  Thus, the rule was procedurally defective.  The court vacated the rule and remanded to the FSA. 

Domesticated Animal Activity Act Doesn’t Provide Immunity for Feedlot Operator

Vreeman v. Jansma, No. 22-1365, 2023 Iowa App. LEXIS 492 (Iowa Ct. App. Jun. 21, 2023)

The defendant operated a feedlot and discovered a downed heifer in an area where he couldn’t get tractor or equipment to assist the heifer in getting up.  He called the plaintiff to come and help him with the task, something the plaintiff has assisted with in the past.  While trying to get the heifer to her feet, the plaintiff’s leg was severely injured.  The plaintiff sued for negligence and the defendant motioned for summary judgment, citing the Iowa Domesticated Animal Activity Act (Iowa Code Ch. 673) (Act) as providing him with immunity from suit.  The Act states that “A person, including a domesticated animal professional, domesticated animal activity sponsor, the owner of the domesticated animal, or a person exhibiting the domesticated animal, is not liable for the damages, injury or death suffered by a participant or spectator resulting from the inherent risks of a domesticated animal activity.”  The plaintiff asserted that the Act was inapplicable because standing up a downed heifer is not a “domesticated animal activity.”  The trial court granted summary judgment to the defendant and the plaintiff appealed.  The appellate court reversed, noting that the statute provided a specific list of definitions for “domesticated animal activity” and that standing up a downed heifer was not in the list. 

Conclusion

There’s never a dull moment in agricultural law and taxation.  Stay tuned for more developments in future posts.

July 12, 2023 in Bankruptcy, Civil Liabilities, Regulatory Law, Secured Transactions | Permalink | Comments (0)

Saturday, July 8, 2023

Coeur d’ Alene, Idaho, Conference – Twin Track

Overview

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

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

Idaho Conference

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

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

Tax Track (Day 1)

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

Tax Track (Day 2)

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

Ag Law Track (Day 1)

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

Ag Law Track (Day 2)

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

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

Speakers

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

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

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

The speakers for the ag law track are as follows:

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

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

Who Should Attend

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

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

Sponsorship

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

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

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

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

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

Sunday, June 25, 2023

Court Says COE Must Pay for Mismanagement of Water Levels in Missouri River

Overview

Recently, the U.S. Court of Appeals for the Federal Circuit largely affirmed a lower court ruling that the U.S. Army Corps of Engineers unconstitutionally violated the property rights of certain farmers along the Missouri River.  The case stemmed from changed in the COE’s manual for managing waters levels in the river.  Obviously, the appellate court’s decision is very important for the particular farmer’s involved, but it also is an important victory for private property rights.

Property rights of farmers along the Missouri River – it’s the topic of today’s post.

Background

Ideker Farms, Inc. et al. v. United States, No. 14-183L, 2020 U.S. Claims LEXIS 2548 (Fed. Cl. Dec. 14, 2020), affn'g. in part, vacn'g. in part and remanding, No. 2021-1849, 2021-1875, 2023 U.S. App. LEXIS 15005 (Fed. Cir. Jun. 16, 2023).

The liability issue.  In 2014, 400 farmers along the Missouri River from Kansas to North Dakota sued the federal government claiming that the actions of the U.S. Army Corps of Engineers (COE) led to and caused repeated flooding of their farmland along the Missouri River.  The farmers alleged that flooding in 2007-2008, 2010-2011, and 2013-2014 constituted a taking requiring that compensation be paid to them under the Fifth Amendment.  The litigation was divided into two phases – liability and just compensation.  The liability phase was decided in early 2018 when the court determined that some of the 44 landowners selected as bellwether plaintiffs had established the COE’s liability.  In that decision, the court held that the COE, in its attempt to balance flood control and its responsibilities under the Endangered Species Act, had released water from reservoirs “during periods of high river flows with the knowledge that flooding was taking place or likely to soon occur.”  The court, in that case, noted that the COE had made changes to its “Master Manual” in 2004 and made other changes after 2004 to reengineer the Missouri River and reestablish more “natural environments” to facilitate species recovery.  Those changes led to unprecedented releases from Gavins Point Dam in South Dakota after heavy spring rains and snowmelt in Montana during early 2011.  The large volume of water released caused riverbank destabilization which led to flooding and destroyed all of the levees along the lead plaintiff’s farm and an estimated $2 billion in damages.  The COE claimed it acted appropriately to manage the excess water.  Ultimately, the court, in the earlier litigation, determined that 28 of the 44 landowners had proven the elements of a takings claim – causation, foreseeability and severity.  The claims of the other 16 landowners were dismissed for failure to prove causation. The court also determined that flooding in 2011 could not be tied to the COE’s actions and dismissed the claims for that year. 

Damages.  Subsequent litigation involved a determination of the plaintiffs’ losses and whether the federal government had a viable defense against the plaintiffs’ claims.  The court found that the “increased frequency, severity, and duration of flooding post MRRP [Missouri River Recovery Program] changed the character of the representative tracts of land.”  The court also stated that, “ [i]t cannot be the case that land that experiences a new and ongoing pattern of increased flooding does not undergo a change in character.”  The court determined that three representative plaintiffs, farming operations in northwest Missouri, southwest Iowa and northeast Kansas, were collectively owed more than $10 million for the devaluation of their land due to the establishment of a “permanent flowage easement” that the COE acquired along with repairs to a levee.  The easement and levee damage constituted a compensable taking under the Fifth Amendment.  However, the court determined that the COE need not compensate the plaintiffs for property and crop losses, and that flooding from 2011 was not compensable. The impact of the court’s ruling meant that hundreds of landowners affected by flooding in six states are likely entitled to just compensation for the loss of property value due to the new flood patterns that the COE created as part of its MRRP. Both parties appealed. 

Appellate decision.  The appellate court affirmed on the compensable taking issue, but determined that the lower court erred by excluding crop damages occurring between 2007 and 2014 from the damages calculation.  Thus, the appellate court vacated the lower’s court determination not to award compensation for crop and property damage for those years and remanded for a determination of the amount of the crop damage to both mature and immature crops.  The compensable taking was for both a flowage easement and crop damage.  The appellate court also determined that the lower court failed to consider whether the actions of the COE actions in accordance with its Master Manual changes increased the severity or duration of the 2011 flooding compared to what was attributable to the record rainfall that year.   

Implications

As noted above, the appellate court held that not had a Taking occurred, but that the farmers in the case had to be paid for all of the crops that were destroyed over the seven year period at issue (2007-2014).  The appellate court’s opinion is important for the fact that it establishes that the government must pay for the damages it causes when it floods farmland and destroys crops.  Certainly, the government has the power to “take” property that it wants.  The Constitution ensures that the government pays for what it takes.  That principle was appropriately applied in this instance.

June 25, 2023 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Sunday, June 18, 2023

Sunday Afternoon Random Thoughts on Ag Law and Tax

Overview

I am in the midst of a 10-day traveling and speaking “tour” and have a moment to share a few thoughts of what has been rolling around in my mind (besides what I have been teaching recently).  Some of these thoughts are triggered by questions that I receive, others by cases that I read, yet still others simply from conversations that I have had with other recently.  Those thoughts include liability for guests on the farm; the usefulness of Health Savings Accounts; pre-paid farm expenses and death; putting a plan in place to address long-term health care costs; and custom agreements for direct beef sales from the farm.

Random thoughts in ag law and tax – it’s the topic of today’s blog article.

Direct Beef Sales and Custom Agreements

It seems that the interest in buying beef products directly from cattle producers is on the rise. But direct sales/purchases may trigger some different rules.  In general, if a person wants to buy beef directly from a cattle producer the law treats the transaction differently depending on whether the live animal is sold to the buyer or whether processed beef is sold.  The matter turns on whether the animal owner is the end consumer.  If the cattle producer sells processed beef to the buyer, the processing of the animal must occur in an inspected facility and the producer would also be subject licensing, labeling and insurance requirements.  But if the producer sells the live animal to the buyer then the producer can also do the processing and sell any remaining beef not initially purchased to another buyer.    

This means that a contract should clearly state that the live animal is being sold and in what percentage.  If a specific animal is sold, the animal should be identified.  Also, the calculation of the price should be detailed and how payment is to be made.  Any processing fees should be set forth and the agreement should be clear that the meat can’t be resold or donated.  In addition, it is important to make sure to clearly state when the animal is the buyer’s property.  The key point is that the owner of the animal and the consumer of the beef must be the same. 

The bottom line is to have a good custom harvest agreement to be able to use the custom exempt processing option. 

Handling Long-Term Care Costs

Planning for long-term care costs should be an element of a complete estate plan for many farm and ranch families.  Having a plan can help minimize the risk that the farm assets or land would have to be sold to come up with the funds to pay a long-term care bill.  What are some steps you can take to put a plan in place that will protect the farm assets from being sold to pay a long-term health care bill? 

A ballpark range of the monthly cost of long-term care is $7,000-9,000 in many parts of the country.  If you are planning on covering that expense with Medicaid benefits keep in mind that you can only have very little income and assets to be eligible. 

A good place to start is to estimate your current monthly income sources.  What do you have in rents, royalties, Social Security benefits, investment income, and other income?  You will only need to plug the shortfall between the monthly care cost and your then current monthly income sources.  That difference might be able to be made up with long-term care insurance.  Those policies can differ substantially, so do your homework and examine the terms and conditions closely.    

If a policy can be obtained to cover at least the deficiency that income doesn’t cover, all of the farm assets will be protected. Many insurance agents and financial advisors can provide estimates for policies and help you determine the type of policy that might be best for you. 

When should you be thinking about putting a plan together?  Certainly, before a major medical problem occurs.  If you are in relatively good health, policy premiums will be less.  Certainly, before age 70 would be an excellent time to employ a plan.

Planning to protect assets from depletion paying for long-term health care costs is beset with a complex maize of federal and state rules.  Make sure you get good guidance. 

Pre-Paid Farm Expenses and Death

Many cash-basis farmers pre-pay next-year’s input expenses in the current year and deduct the expense against current year income.  The IRS has specific rules for pre-paying and deducting.  Another issue with pre-paid inputs is what happens if a farmer claims the deduction and then dies before using the inputs that were purchased? 

To be able currently deduct farm inputs that will be used in the next year, three requirements must be met.  The items must be purchased under a binding contract for the purchase of specific goods of a minimum quantity; the pre-purchase must have a business purpose or not be entered into solely for tax avoidance purposes; and the transaction must not materially distort income. 

If the rules are satisfied but the farmer dies before using the inputs that were purchased, what happens?  In Estate of Backemeyer v. Comr., 147 T.C. 526 (2016), a farmer pre-purchased about $235,000 worth of inputs associated with the planting of next year’s crop.  The deduction was taken on the return for the year of purchase, but the farmer died before using the inputs.  The inputs passed to his widow who used them to put the crop in the ground.  She deducted the inputs again on the return for that year.  The IRS objected, but the court said that’s the way the tax rules work.  The value of the inputs was included in his estate, and she could claim a deduction against their cost basis – the fair market value at the time of his death.

Liability for Guests on the Farm

What’s your liability for guests on the farm?  The answer is, “it depends.”  Facts of each situation are paramount, and the outcome of each potential liability event will turn on those facts. For example, in Jones v. Wright, 677 S.W.3d 444 (Tex. Ct. App. 2023), a family who came to the plaintiffs’ property to look at a display of Christmas lights sued the landowner for the death of their child who was killed by a motorist while crossing the road after leaving the premises. 

When they left the property, their minor child was struck and killed by a vehicle while crossing the road to get to the family’s vehicle. The family sued the landowners for wrongful death and negligence claiming that they were owed a duty of care as invitees that was breached by the landowners’ failure to make the premises safe or warn of a dangerous condition.

The court disagreed based on several key factors.  The landowners didn’t charge a fee for viewing the lights; the vehicle that struck the child was being driven at night without lights; there hadn’t been any similar prior accidents on the road; the landowners used loudspeakers to tell visitors not to park on the opposite side of the road; and the accident occurred on property the landowners didn’t own.  Based on those facts, the court said the landowners didn’t breach any duty that was owed to the family.  The child’s death was not a foreseeable risk. 

But slightly different facts could have led to a different outcome.

Health Savings Accounts

One of the best-kept secrets of funding medical costs is a Health Savings Account (HSA).  Surveys indicate that a self-employed farmer pays about $12,000-$15,000 annually for health insurance.  To make matters worse, the policies often come with high deductibles and limited coverage.  An HSA can provide current and future income tax benefits while simultaneously allowing the self-funding of future medical costs. 

An issue for many is that it’s unlikely that medical expenses are deductible for failure to meet the threshold for itemizing deductions.  That threshold is only likely to be met in a year when substantial medical costs are incurred.  An HSA is an option without the deduction restrictions, but it does need to be paired with a high deductible insurance policy.

With an HSA, contributions are deductible up to $7,750 this year for a family, earnings grow tax-free, and distributions to pay for qualified medical expenses are also not taxed. Qualified expenses include Medicare premiums, or any other qualified medical expenses incurred before retirement.  If you’re a farmer that files a Schedule F, an HSA is the simplest and most cost-effective way to receive a deduction for medical costs. 

But you can’t contribute to an HSA once you are enrolled in Medicare. So, it might be a good idea to fully fund an HSA but not take any distributions until retirement.  One downside with an HSA is that if it is inherited, the recipient has one year to cash it in.  If there aren’t any qualified expenses to be reimbursed, income tax will result.

Conclusion

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

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

Wednesday, May 17, 2023

Decision to not Review USDA Wetland Certification Upheld – What Does the Grassley Amendment Require?

Overview

The “Swampbuster” rules were enacted as part of the conservation provisions of the 1985 Farm Bill.  In general, the rules prohibit the conversion of “wetland” to crop production by producers that are receiving farm program payments.  A farmer that is determined to have improperly converted wetland is deemed ineligible for farm program payments.  But an exception exists for wetland that was converted to crop production before December 23, 1985 – the effective date of the 1985 Farm Bill. 

Under the Swampbuster rules, “wetland” has:  (1) a predominance of hydric soil; (2) is inundated by surface or groundwater at a frequency and duration sufficient to support a prevalence of hydrophytic vegetation typically adapted for life in saturated soil conditions, and (3) under normal circumstances does support a prevalence of such vegetation. 7 C.F.R. §12.2(a).  In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.   

However, there have been several prominent cases in recent years illustrating that the Natural Resources Conservation Service (NRCS) has trouble applying the definition as it attempts to determine whether a particular tract has wetlands.  A recent decision of the United States Department of Agriculture (USDA) National Appeals Division (NAD) makes the point.

Congress amended the Swampbuster statute in 1996 to curtail attempts of NRCS to frequently change wetland delineations.  The amendment specified that prior wetland delineations could only be changed upon a farmer’s request.  That amendment was the subject of a recent case involving a South Dakota farmer.

The 1996 amendment to the Swampbuster rules – that’s the topic of today’s post.

The “Grassley” Amendment

In 1990, the Congress amended the Swampbuster Act to provide a review provision specifying that a prior wetland certification “shall remain valid and in effect…until such time as the person affected by the certification requests review of the certification by the Secretary.”  16 U.S.C. §3822(a)(4).  This became known as the “Grassley Amendment” named after Senator Charles Grassley of Iowa.  Based on the statutory amendment, the USDA developed a regulation, known as the “Review Regulation,” providing procedural requirements a farmer must follow to make an effective review request.  The regulation said a request to review a certification could be made only if a natural event had altered the topography or hydrology of the land or if NRCS believed that the existing certification was erroneous.  7 C.F.R. §12.30(c)(6). 

The Foster Case

Facts and trial court decision.  In Foster v. United States Department of Agriculture, No. 4:21-CV-04081-RAL, 2022 U.S. Dist. LEXIS 117676 (D. S.D. Jul. 1, 2022), the plaintiff owned farmland containing a .8-acre portion that USDA certified as a “wetland” in 2011 under the Swampbuster provisions of 16 U.S.C. §§3801, 3821-3824.  The wetland was about 8.5 inches deep at certain times during the year, particularly in the spring after snow melt and didn’t drain anywhere.  The wetland resulted from a tree belt that had been planted in 1936 to prevent soil erosion.  Snow accumulated around the tree belt in the winter and melted in the spring with the water collecting in a low spot in of the field before soaking into the ground or evaporating.  In about one-half of the crop years, the puddle would dry out in time or planting.  The certification meant that the puddle could not be drained so that it and the surrounding land could not be farmed without the loss of federal farm program benefits. 

In 2008, Foster request a review of a certification and USDA granted the request simply on the basis of the statute which plainly states that a review of a certification is available upon request.    The request was granted even though the regulation was in place at that time.  The area was recertified as a wetland in 2011.  This was despite Foster having dug two test holes to monitor water levels in the disputed area – one of which was immediately next to the trees.  The data Foster collected showed that the trees slowed the drying of the soil in the hole next to the trees.  The USDA/NRCS refused the data, claiming that Foster didn’t’ have the expertise to interpret the data.  As a result, Foster installed two weather stations and hired an engineering firm to “officially” conclude that the tree belt was slowing the drying of the soil. 

Foster challenged the 2011 recertification, but the trial court affirmed the determination as not arbitrary and capricious (the judicial deference standard given administrative agency decisions).  The U.S. Court of Appeals for the Eighth Circuit affirmed, and the U.S. Supreme Court declined to review the case.  Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016), cert. den., 137 S. Ct. 620 (2017). 

Note:  Before Foster’s request for review of the 2011 certification, another South Dakota farmer with a similar set of facts successfully had NRCS remove a wetland label on a .3-acre portion of a field.  Like Foster’s situation, the .3-acre portion was impacted by snow caught in a tree belt.  Thus, after the court decisions, the question remained as to whether a farmer has a legal obligation to present evidence of changed conditions.  The statute contains no such requirement.  In 2008, the recertification request was granted with no obligation on Foster’s part to provide evidence of changed conditions.  The evidence provided was not requested.  Also, published NRCS infiltration rates for the soil type of the depression indicated that the ponding would be gone in less than two weeks (the required inundation period for a wetland finding). 

In 2017, Foster again sought a review of the certification under 16 U.S.C. §3822(a)(4) which, as noted, provides for review of a final certification upon request by the person affected by the certification.  The USDA/NRCS didn’t respond on the basis that Foster didn’t provide new information that the NRCS hadn’t previously considered.  Foster filed for review again in 2020 along with professionally prepared engineering reports from two firms that concluded that the area in question ponded due to the tree belt and was an artificial wetland not subject to Swampbuster. 

The USDA denied review in 2020 citing its own regulation of 7 C.F.R. §12.30(c)(6) which required the plaintiff to show how a natural event changed the topography or hydrology of the wetland that caused the certification to no longer be a reliable indicator of site conditions.  The plaintiff claimed that new evidence existed that would refute the 2011 certification, and also claimed that 16 U.S.C. §3822(a)(4) provided no restriction on the ability to get a review and, as a result, 7 C.F.R. §12.30(c)(6) violated the due process clause by restricting reviews and was arbitrary and capricious under the Administrative Procedure Act.   

The trial court held that 7 C.F.R. §12.30(c)(6) merely restricted when an agency must review a final certification.  The trial court also determined that 7 C.F.R. §12.30(c)(6) did not violate the due process clause as the plaintiff did not show any independent source of authority providing him with a right to certification review on request. The USDA’s denials of review were found not to be arbitrary or capricious and that the plaintiff failed to provide any evidence that the natural conditions of the site had changed, which would require a review of the certification.  The plaintiff also claimed that the Swampbuster provisions were unconstitutional under the Commerce Clause and the Tenth Amendment.  

The trial court rejected the plaintiff’s claims and determined that the statute of limitations on challenging the certification had run.  The trial court also held that the USDA was entitled to summary judgment on the plaintiff’s claim that Swampbuster was unconstitutional, holding that the provisions were within the power of the Congress under the spending clause of Article I, Section 8 of the Constitution.  The trial court also ruled that Swampbuster did not infringe upon state sovereignty by requiring states to implement a federal program, statute or regulation. The trial court further rejected the plaintiff’s claim that a part of Swampbuster violated the Congressional Review Act, finding that the provision at issue was precluded from judicial review.  The court dismissed all the plaintiff’s claims against the USDA and denied the ability for the area to be reviewed again. 

The appellate court.  Foster filed an appeal with the U.S. Court of Appeals for the Eighth Circuit on August 16, 2022, and the appellate court issued its opinion on May 12, 2023.  The appellate court affirmed.  The court stated that NRCS noted the engineer’s report and asked the engineering firm to identify any evidence that the NRCS had not fully considered the tree belt at the time of the 2011 recertification decision.  The appellate court stated, “Neither Foster nor the engineering firm ever responded to the request.”  The court went on to state that the NRCS reviewed the engineering report, compared it to the record, and declined the review request for noncompliance with the regulation.

Note:  The court’s statement that the NRCS requested additional evidence is false.  The NRCS letter of May 14, 2020, to Foster by State Conservationist Jeffrey Zimprich merely stated that, “Based on the evidence you provided, I am unable to determine that any of the conditions mentioned above for a redetermination apply.”  There was no request for additional information from either Foster or the engineering firms.

The appellate court concluded that the regulation was not inconsistent with the Swampbuster Act.  There was simply nothing that could be gleaned from the Grassley Amendment as guidance to what constitutes a proper review request.  As such the statute was ambiguous and the administrative procedural requirements were permissible.  The Grassley Amendment was merely so that farmers had a way to contest new NRCS wetland delineations for Swampbuster purposes.  It did not preclude USDA/NRCS from developing procedural requirement to challenge a certification.    

The appellate court also affirmed the trial court’s finding with respect to the Congressional Review Act for lack of authority to review the claim.  The appellate court also affirmed the trial court’s finding that the NRCS refusal to consider the request was not arbitrary and capricious.

Note:  In the concluding paragraph of the appellate court’s opinion, the appellate court stated that, “the NRCS requested Foster’s engineering firm to identify evidence showing the NRCS had failed to consider the tree belt on the Site when it made its prior certification.  The record shows no indication that Foster or his engineering firm responded to this request.”  Unfortunately, the appellate court offers no support for this assertion and there is no record of such a request ever having been made.  What the appellate court bases this statement on is not known.

Conclusion

The Grassley Amendment is clear that can rely on a wetland determination until a new determination is requested.  The point of the amendment is to bar NRCS from unilaterally changing a determination once made.  A farmer may request a redetermination.  While it is reasonable to require that new information bearing on a stie’s wetland status be provided when a redetermination is requested, Foster provided that information in the form of professional engineering reports.  Here, NRCS failed to understand the professional reports submitted with the review request and also did not make a clear request for additional information/clarification.  Indeed, no request at all was made for additional information.  Clearly, the .8-acre depression was the result of snowpack caused by a tree belt and NRCS’ own data showed that the ponding of the depression would be gone in less than two weeks.  A regulation that allows a farmer to receive a redetermination upon NRCS admitting it made an error (one of the two possibilities for a review to be granted) makes it highly unlikely that a review would be granted.

In the Foster case, perhaps an en banc review will be requested. 

May 17, 2023 in Environmental Law, Regulatory Law | Permalink | Comments (0)