Thursday, February 16, 2023
Foreign Ownership of Agricultural Land
Overview
An issue that has been around a very long time and dates back to the foundation of the United States is that of agricultural land being owned by non-U.S. citizens and/or entities. It’s a national security and food security issue. Some states have had restrictions for many years and are considering strengthening existing provisions. Others are looking at the issue for the first time. The Kansas legislature currently has bills under consideration in both houses.
Foreign ownership of agricultural land – it’s the topic of today’s post.
Background of Foreign Ownership Restrictions
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 did not want disloyal subjects owning or acquiring an interest in land. The common law rule existed in England until it was abolished by statute in 1870. However, by that time, the notion of limiting alien ownership of agricultural land was well imbedded in United States jurisprudence. 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.
Agricultural Foreign Investment Disclosure Act
In 1978, 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.
AFIDA requires reports in four situations: (1) when a foreign person “acquires or transfers any interest, other than a security” in agricultural land; (2) when any interest in agricultural land, except a security interest, is held by any foreign person on the day before the effective date of the Act; (3) when a nonforeign owner of agricultural land subsequently becomes a foreign person; and (4) when nonagricultural land owned by a foreign person subsequently becomes agricultural land.
AFIDA defines “agricultural land” as “any land located in one or more states and used for agricultural, forestry, or timber production purposes...”. 7 U.S.C. § 3508(1). The regulations define agricultural land as “land in the United States which is currently used for, or if idle and its last use within the past five years was for, agricultural, forestry, or timber production, except land not exceeding one acre from which the agricultural, forestry, or timber products are less than $1,000 in annual gross sales value and such products are produced for the personal or household use of the person or persons holding an interest in such land.” 44 Fed. Reg. 7117 (1979); 7 C.F.R. § 781.2(b). In 1980, the Secretary proposed a change in this definition to increase the acreage amount to ten acres, while preserving the gross sales test. However, the proposed change has not yet become effective.
The reporting provisions of the AFIDA require the disclosure of considerable information regarding both the land and the reporting party. The information must be reported on Form FSA-153 and includes: (1) the legal name and address of the foreign person; (2) the citizenship of the foreign person, if an individual; (3) if the foreign person is not an individual or government, the nature of the legal entity holding the interest, the country in which the foreign person is created or organized, and the principal place of business; (4) the type of interest in agricultural land that the person acquired or transferred; (5) the legal description and acreage of the agricultural land; (6) the purchase price paid, or other consideration given, for such interest; (7) if a foreign person transfers an interest, the legal name and address of the person to whom the interest is transferred; (8) the agricultural purposes for which the agricultural land is being used and for which the foreign person intends to use the agricultural property; and (9) such other information as the Secretary of Agriculture may require by regulation. 7 U.S.C. § 3501(a)(9).
State Restrictions
State statutes designed to restrict alien ownership of real property are generally of three types: (1) outright restrictions on the acquisition of certain types of property; (2) limitations on the total amount of land that can be acquired; and (3) limitations on the length of time property can be held. Acquisition restrictions are common in the agricultural context, with the restriction generally applying only to the acquisition of farmland, as defined by the law. Exceptions are common for the acquisition of land for conversion to nonagricultural purposes, land acquired by devise or descent, and land acquired through collection of debts or enforcement of liens or mortgages. Acreage restrictions allow foreign investment but place a premium on having an effective method of discovering and preventing multiple acquisition by the same individuals through the use of various investment vehicles. Time restrictions generally do not apply to voluntary acquisition of the land by foreign investors but are associated with involuntary acquisitions. Some states require the disclosure of information concerning the land acquired and the investors.
Currently, about one-half of the states restrict agricultural land acquisition by aliens. The number is approximate because legislative efforts to legislate in this area have been swift in recent years and continue during the 2023 session in several states. The states with the most restrictive laws are IL, IN, IA, KY, MN, MO, NE, ND, OK, SD and WI. Approximately 13 other 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, Arkansas, California, Florida, Indiana, Mississippi, Missouri, Montana, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, and Wyoming. Each of these states have proposed, or plan 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 very recent and 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 following is a brief summary of what some of the other states have proposed recently:
Colorado HB 23-1152
- Prohibits, starting on January 1, 2024, a nonresident foreign citizen, entity, or government of the People’s Republic of China, the Russian Federation or any country determined by the US secretary of state to be a state sponsor of terrorism from acquiring a controlling ownership share in ag land, mineral rights, or water rights in the state.
- A covered foreign person who acquires a controlling ownership share in a property interest in the state prior to January 1, 2024, may continue to own the property interest but not acquire controlling ownership in any additional property interests.
- A covered foreign person must register with the secretary of state within 60 days of acquiring ownership in property interests.
- If the state attorney general has reason to believe a covered foreign person has not complied with the law, the attorney general must bring a civil action against the covered person. If the court finds the covered foreign person has violated the prohibition the judgment will revert the property interest to the state.
Illinois HB 1267
- Would bar the purchase of public or private real estate by noncitizens for five years after the effective date.
- A “noncitizen” includes an foreign government, entity, corporation, partnership, or other association created under the laws of a foreign country and beneficially owned by a national of that foreign country
New Jersey A5120
- A foreign government or person owning or holding interest in ag land shall sell or convey the ownership within 5 years of the effective date of the Act.
- Ag land acquired by a foreign government or person shall be sold or conveyed within two years after title to the land is transferred thereto. Upon such conveyance, a deed of easement shall be attached to the land requiring it to remain devoted to ag use.
- The land conveyed should not be conveyed to a foreign person or government.
North Dakota SB 2371
- The bill gives counties and municipalities the power to prohibit local development by a foreign adversary.
- County commissions, city commissions, or city council may decide not to authorize a development agreement with a foreign adversary whether individual or government.
Oklahoma SB 212
- No person who is not a US citizen shall acquire title to land either directly through a business entity or trust.
- Exempt is any business entity that has legally operated in the U.S. 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 with the provision.
- 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.
- Creates a citizen land ownership unit to enforce the provisions of the act within the office of the attorney general.
Texas SB 711
- Prohibited foreign actors may not acquire title to real property without written notification to the seller.
- A “prohibited foreign actor” is an alien, business, government, or an agent from a country identified as a country that poses a risk to the national security of the U.S. in the most recent Annual Threat Assessment issued by the Director of National Intelligence.
- A buyer required to provide written notification shall do so as soon as possible but not later than 10 days before the closing of the property.
- Upon receipt of notification, seller may choose to proceed or revoke sale.
- Court shall dismiss any action brought against seller for revoking a sale.
Current Kansas Law
The Kansas restriction on foreign ownership, to the extent there is one, is contained in the Kansas Constitution and in the anti-corporate farming law. Section 17 of the Kansas Bill of Rights states as follows:
“No distinction shall ever be made between citizens of the state of Kansas and the citizens of other states and territories of the United States in reference to the purchase, enjoyment or descent of property. The rights of aliens in reference to the purchase, enjoyment or descent of property may be regulated by law.”
The Kansas Bill of Rights, as noted, gives the legislature the power to regulate foreign ownership of “property” – in terms of its, purchase, enjoyments or descent. One manner that the legislature has chosen to do that is by means of the anti-corporate farming law. Kan. Stat. Ann. §17-5904. This provision states that, “no corporation, trust, LLC, limited partnership or corporate partnership other than a family farm corporation … shall either directly or indirectly, own, acquire or otherwise obtain or lease any agricultural land in this state. However, there are many situations to which the restriction does not apply (in addition to not applying to a family farm corporation).
The law was later amended to provide that production contracts “shall not be construed to mean the ownership, acquisition, obtainment, or lease either directly or indirectly on any ag land.”
A violation of the anti-corporate farming law subjects the violator to a civil penalty of not more than $50,000 and the violator must divest itself of all land acquired in violation of the anti-corporate farming law. Violations may be pursued by either the state attorney general or by a county attorney.
Kan. Stat. Ann. §17-7505 contains a reporting requirement. It provides as follows:
- Every foreign corporation doing business in this state shall make a written business entity information report to the secretary of state.
- The report shall be made on a form prescribed by the secretary of state.
- The report shall contain:
- The name and the state or country of incorporation.
- The location of its principal office
- The names and addresses of the officers and board of directors.
- The number of shares of capital stock issued.
- The nature of the business
- If the corporation holds more than 50% equity in ownership in any other business registered with the secretary of state, the name and ID number of that other business.
- Corporations subject to the provisions of this section that holds ag land within this state shall show the following additional information.
- The acreage and location of ag land this state owned or leased by or to the corporation.
- The purposes of the ownership or lease
- The value of the ag and non-ag assets owned and controlled by the corporate within and without the state of Kansas and where situated.
- The number of stockholders of the corporation
- The number of acres owned and leased by the corporation and to the corporation.
- The number of acres of ag land held and reported in each category under paragraph 5
- Whether any of the ag land was acquired after July 1, 1981
- The official title of the person signing the report must be designated.
Note: Presently, 2.3 percent of all privately held agricultural land in Kansas is held by a foreign individual or entity. “Held” means anything from outright title ownership to any interest in the land other than a security interest. But, “held” does not include leaseholds of less than 10 years’ duration, contingent future interests, non-contingent future interests that don’t become possessory upon termination of the present estate, non-agricultural easements and rights-of-way, and interests solely in mineral rights. The percentage of foreign “holdings” includes land under long-term wind energy leases where the lessee is a foreign-owned entity.
Current Kansas Proposals
House Bill 2397
This bill, which would be effective, July 1, 2023, specifies that no person who is owned by or controlled by or subject to the jurisdiction of a “foreign adversary” shall purchase, acquire by grant, devise or descent or otherwise obtain ownership of any interest in real property. This is defined as an individual or entity acting as an agent, representative or employee, or anyone acting at the order, request or under the direction or control of a foreign adversary or whose activities are directly or indirectly under the supervision, control, direction or are being financed or otherwise subsidized primarily by a foreign adversary. An exception exists for a person that has acquired dual citizenship with the U.S. and a foreign adversary.
Note: While the bill does not limit the restriction on foreign ownership to agricultural land, it doesn’t prevent residential home ownership, for example, by a person who has dual residency in the U.S. and a foreign adversary or a “nation state” that is controlled by a foreign adversary. This is a reasonable approach to ensuring that home ownership is by a person that is not disloyal to the U.S. given the time necessary to become a dual citizen and the associated vetting that is done during the process to achieve dual citizenship. Of course, as noted below, there are very few countries that are on the foreign adversary list. In essence, home ownership by a non-U.S. citizen (even one that has dual citizenship with a foreign adversary) is permissible so long as the person is not a foreign agent.
“Foreign adversary” is defined by tying it to a federal regulation that provides a list set forth in 15 C.F. R Sec. 7.4 as that list exists on July 1, 2023. Currently on that list are: (1) the People's Republic of China, including the Hong Kong Special Administrative Region (China); (2) the Republic of Cuba (Cuba); (3) the Islamic Republic of Iran (Iran); (4) the Democratic People's Republic of Korea (North Korea); (5) the Russian Federation (Russia); and (6) Venezuelan politician Nicolás Maduro (Maduro Regime). The bill vests power in the Secretary of Agriculture to modify the list, but only if the federal government amends the list after July 1, 2023.
The provision does not apply to land acquired by the collection of debts, foreclosure pursuant to a forfeiture of a contract for deed, and any procedure for the enforcement of a lien or claim on the land.
Land subject to the provision, is to be sold or otherwise disposed of within two years after title is transferred, and a covered “person” who inherits real property on or after July 1, 2023, has 12 months to divest of property once the violation is known. Other subject land transaction may be forfeited.
The Kansas Attorney General has the power to enforce the provisions of the bill.
Senate Bill 100
Senate Bill 100 has also been proposed this session in the Kansas Senate. This bill seeks to restrict a “foreign national, foreign business entity, and foreign government” from acquiring, purchasing, or holding any interest in land within the state. A “foreign business entity” is defined by ownership. Ownership of land in Kansas is barred under the provision if the majority ownership of an entity is held by a foreign national (non-U.S. citizen) or foreign government (any non-U.S. nation); or foreign business entity. The provision is prospective only and does not apply to any real property purchased or otherwise acquired before July 1, 2023. Also, the provisions of the bill do not apply to real estate located wholly in Johnson, Sedgwick, Shawnee or Wyandotte counties.
Enforcement rests with the Kansas Attorney General and a violation of the provisions of the bill is deemed to be a level 10 nonperson felony. The Attorney General may investigate any transaction believed to violate the bill. Further. The bill specifies that land held in violation of the restriction is subject to forfeiture, with the state then taking possession of the land.
General Comments on the Kansas Proposals
The bills take different approaches to address the issue. The House Bill is more specifically tailored to restricting ownership by a “foreign adversary” as the federal government defines that term. The Senate Bill focuses on percentage ownership by a “foreign business entity” defined as ownership by persons that are not U.S. citizens as well as entities that are majority owned by non-U.S. citizens.
Over the past 30 years, the Kansas legislature has encouraged the use of “renewable” forms of energy. Often, the companies heavily involved in such energy production are foreign-owned. While the House Bill would not impact current or future development of projects on agricultural land (because the companies involved are not presently on the “foreign adversary” list), the Senate Bill appears to present some issues by its percentage ownership requirements and defining “foreign” as non-U.S. citizen.
Conclusion
Whichever approach the Kansas legislature takes on this issue, what should remain in focus is that the whole matter involves national security and control of the food supply. Neither of those are political issues. That’s true in Kansas and nationwide. Foreign ownership of agricultural land has been an issue from the time of the founding of the U.S. It’s an even greater concern today.
February 16, 2023 in Regulatory Law | Permalink | Comments (0)
Monday, January 30, 2023
Bibliography - July Through December 2022
Overview
After the first half of 2022, I posted a blog article of a bibliography of my blog articles for the first half of 2022. You can find that bibliography here: Bibliography – January through June of 2022
Bibliography of articles for that second half of 2022 – you can find it in today’s post.
Alphabetical Topical Listing of Articles (July 2022 – December 2022)
Bankruptcy
More Ag Law Developments – Potpourri of Topics
Business Planning
Durango Conference and Recent Developments in the Courts
Is a C Corporation a Good Entity Choice For the Farm or Ranch Business?
What is a “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
Federal Farm Programs: Organizational Structure Matters – Part Three
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
Civil Liabilities
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Contracts
Minnesota Farmer Protection Law Upheld
Criminal Liabilities
Durango Conference and Recent Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/20Ag Law Summit
https://lawpr22/07/durango-conference-and-recent-developments-in-the-courts.html
Environmental Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
More Ag Law Developments – Potpourri of Topics
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Estate Planning
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Modifying an Irrevocable Trust – Decanting
Farm and Ranch Estate Planning in 2022 (and 2023)
Social Security Planning for Farmers and Ranchers
How NOT to Use a Charitable Remainder Trust
Recent Cases Involving Decedents’ Estates
Medicaid Estate Recovery and Trusts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/medicaid-estate-recovery-and-trusts.html
Income Tax
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal With Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
What is “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Declaring Inflation Reduced and Being Forgiving – Recent Developments in Tax and Law
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas
More Ag Law Developments – Potpourri of Topics
IRS Audits and Statutory Protection
https://lawprofessors.typepad.com/agriculturallaw/2022/10/irs-audits-and-statutory-protection.html
Handling Expenses of Crops with Pre-Productive Periods – The Uniform Capitalization Rules
When Can Depreciation First Be Claimed?
Tax Treatment of Crops and/or Livestock Sold Post-Death
Social Security Planning for Farmers and Ranchers
Are Crop Insurance Proceeds Deferrable for Tax Purposes?
Tax Issues Associated With Easement Payments – Part 1
Tax Issues Associated With Easement Payments – Part 2
How NOT to Use a Charitable Remainder Trust
Does Using Old Tractors Mean You Aren’t a Farmer? And the Wind Energy Production Tax Credit – Is Subject to State Property Tax?
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2022/08/ag-law-summit.html
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Regulatory Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Federal Farm Programs – Organizational Structure Matters – Part One
Federal Farm Programs – Organizational Structure Matters – Part Two
Federal Farm Programs: Organizational Structure Matters – Part Three
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Minnesota Farmer Protection Law Upheld
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs?
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Water Law
More Ag Law Developments – Potpourri of Topics
January 30, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Friday, January 27, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Overview
Today’s article concludes my look at the top ag law and tax developments of 2022 with what I view as the top two developments. I began this series by looking at those developments that were significant, but not quite big enough to make the “Top Ten.” Then I started through the “Top Ten.”
The top two ag law and tax developments in 2022 – it’s the topic of today’s post.
Recap
Here’s a bullet-point recap of the top developments of 2022 that I have written about:
- Nuisance law (the continued developments in Iowa) - Garrison v. New Fashion Pork LLP, 977 N.W.2d 67 (Iowa Sup. Ct. 2022).
- Minnesota farmer protection law - Pitman Farms v. Kuehl Poultry, LLC, et al., 48 F.4th 866 (8th Cir. 2022).
- Regulation of ag activities on wildlife refuges - Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022).
- Corps of Engineers jurisdiction over “wetland” - Hoosier Environmental Council, et al. v. Natural Prairie Indiana Farmland Holdings, LLC, et al., 564 F. Supp. 3d 683 (N.D. Ind. 2021).
- U. S. Tax Court’s jurisdiction to review collection due process determination - Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022).
- IRS Failure to Comply with the Administrative Procedure Act - Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022); Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022).
- State law allowing unconstitutional searches unconstitutional - Rainwaters, et al. v. Tennessee Wildlife Resources Agency, No. 20-CV-6 (Benton Co. Ten. Dist. Ct. Mar. 22, 2022).
- No. 10 – USDA’s Emergency Relief Program and the definition of “farm income.”
- No. 9 - USDA decision not to review wetland determination upheld - 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).
- No. 8 - Dicamba drift damage litigation - Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022).
- No. 7 – The misnamed “Inflation Reduction Act.”
- No. 6 – Caselaw and legislative developments concerning “ag gag” provisions.
- No. 5 - WOTUS final rule.
- No. 4 – Economic issues
- No. 3 – Endangered Species Act regulations
No. 2 – California Proposition 12
National Pork Producers Council, et al. v. Ross, 6 F.4th 1021 (9th Cir. Jul. 28, 2021), cert. granted, 142 S. Ct. 1413 (2022)
In a huge blow to pork producers (and consumers of pork products) nationwide, the U.S. Court of Appeals for the Ninth Circuit has upheld California’s Proposition 12 in 2021. Proposition 12 requires any pork sold in California to be raised in accordance with California’s housing requirements for hogs. This means that any U.S. hog producer, by January 1, 2022, was required to upgrade existing facilities to satisfy California’s requirements if desiring to market pork products in California. In early 2022, the U.S. Supreme Court announced that it would review the Ninth Circuit’s opinion.
While each state sets its own rules concerning the regulation of agricultural production activities, the legal question presented in this case is whether one state can override other states’ rules. The answer to that question involves an analysis of the Commerce Clause and the “Dormant” Commerce Clause.
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 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.
Rationale. 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 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).
California Proposition 12 Litigation
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, No. 3:19-cv-02324-W-AHG (S.D. Cal. Apr. 27, 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, No. 20-55631, 2021 U.S. App. LEXIS 22337 (9th Cir. Jul. 28, 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 e passed on to consumers) is not a substantial burden on interstate commerce in violation of the dormant Commerce Clause.
As noted above, the U.S. Supreme court decided to review the Ninth Circuit’s opinion. Unfortunately, the Supreme 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. The Supreme Court’s decision in 2023 is a highly anticipated one for agriculture and the dormant Commerce Clause analysis and application in general.
No. 1 – The “Major Questions” Doctrine
West Virginia, et al. v. Environmental Protection Agency, et al., 142 S. Ct. 2587 (2022)
Clearly, the biggest development of 2022 that has the potential to significantly impact agriculture and the economy in general is the Supreme Court’s opinion involving the Environmental Protection Agency’s (EPA’s) regulatory authority under the Clean Air Act (CAA). The Court invoked the “major question” doctrine to pair back unelected bureaucratic agency authority and return policy-making power to citizens through their elected representatives. The future impact of the Court’s decision is clear. When federal regulations amount to setting nationwide policy and when state regulations do the same at the state level, the regulatory bodies may be successfully challenged in court.
The case involved the U.S. Supreme Court’s review of the EPA’s authority to regulate greenhouse gas emissions from existing power plants under the CAA. The case arose from the EPA’s regulatory development of the Clean Power Plan (CPP) in 2015 which, in turn, stemmed from then-President Obama’s 2008 promise to establish policy that would bankrupt the coal industry. The EPA claimed it had authority to regulate CO2 emissions from coal and natural-gas-fired power plants under Section 111 of the CAA. Under that provision, the EPA determines emission limits. But EPA took the position that Section 111 empowered it to shift energy generation at the plants to “renewable” energy sources such as wind and solar. Under the CPP, existing power plants could meet the emission limits by either reducing electricity production or by shifting to “cleaner” sources of electricity generation. The EPA admitted that no existing coal plant could satisfy the new emission standards without a wholesale movement away from coal, and that the CPP would impose billions in compliance costs, raise retail electricity prices, require the retirement of dozens of coal plants and eliminate tens of thousands of jobs. In other words, the CPP would keep President Obama’s 2008 promise by bypassing the Congress through the utilization of regulatory rules set by unelected, unaccountable bureaucrats.
The U.S. Supreme Court stayed the CPP in 2016 preventing it from taking effect. The EPA under the Trump Administration repealed the CPP on the basis that the Congress had not clearly delegated regulatory authority “of this breadth to regulate a fundamental sector of the economy.” The EPA then replaced the CPP with the Affordable Clean Energy (ACE) rule. Under the ACE rule, the focus was on regulating power plant equipment to require upgrades when necessary to improve operating practices. Numerous states and private parties challenged the EPA’s replacement of the CPP with the ACE. The D.C. Circuit Court vacated the EPA’s repeal of the CPP, finding that the CPP was within the EPA’s purview under Section 7411 of the CAA – the part of the CAA that sets standards of performance for new sources of air pollution. American Lung Association v. Environmental Protection Agency, 985 F.3d 914 (D.C. Cir. 2021). The Circuit Court also vacated the ACE and purported to resurrect the CPP. In the fall of 2021, the U.S. Supreme Court agreed to hear the case.
The Supreme Court reversed, framing the issue as whether the EPA had the regulatory authority under Section 111 of the CAA to restructure the mix of electricity generation in the U.S. to transition from 38 percent coal to 27 percent coal by 2030. The Supreme Court said EPA did not, noting that the case presented one of those “major questions” because under the CPP the EPA would tremendously expand its regulatory authority by enacting a regulatory program that the Congress had declined to enact. While the EPA could establish emission limits, the Supreme Court held that the EPA could not force a shift in the power grid from one type of energy source to another. The Supreme Court noted that the EPA admitted that did not have technical expertise in electricity transmission, distribution or storage. Simply put, the Supreme Court said that devising the “best system of emission reduction” was not within EPA’s regulatory power.
Clearly, the Congress did not delegate administrative agencies the authority to establish energy policy for the entire country. While the Supreme Court has never precisely defined the boundaries and scope of the major question doctrine, when the regulation is more in line with what should be legislative policymaking, it will be struck down. The Supreme Court’s decision is also broad enough to have long-lasting consequences for rulemaking by all federal agencies including the USDA/FSA. The decision could also impact the Treasury Department’s promulgation of tax regulations.
The Supreme Court’s decision returns power to the Congress that it has ceded over the years to administrative agencies and the Executive branch concerning matters of “vast economic and political significance.” But it’s also likely that the Executive branch and the unelected bureaucrats of the administrative state will likely attempt to push the envelope and force the courts to push back. It’s rare that the Executive branch and administrative agencies voluntarily return power to elected representatives as was done in numerous instances from 2017 through 2020.
Conclusion
Agricultural law and tax issues were many and varied in 2022. In 2023, the U.S. Supreme Court will issue opinions in the California Proposition 12 case and the Sackett case involving the scope of the federal government’s jurisdiction over wetlands. Also, there has been a major development in the Tax Court involving tax issues associated with deferred grain contracts that has resulted in a settlement with IRS, the terms of which cannot be disclosed at this time. If 2022 showed a trend with USDA it is that the USDA will continue several “hardline” positions against farmers – a narrow definition of farm income; broad regulatory control over wet areas in fields; and ceding regulatory authority to the EPA and the COE. The U.S. Supreme Court is also anticipated to issue on opinion with potentially significant implications for Medicaid planning.
Of course, the expanding war against Russia being fought in Ukraine will continue to dominate ag markets throughout 2023. At home, the general economic data is not good and that will have implications in 2023 for farmers and ranchers. On January 26, the U.S Bureau of Economic Analysis issued a report (https://www.bea.gov/) showing that the U.S. economy grew by 2.9 percent in the fourth quarter of 2022 and 2.1 percent for all of 2022. But, the report also showed that economic growth in the economy is slowing. Business investment grew by a mere 1.4 percent in the fourth quarter of 2022, consisting almost entirely of inventory growth. That will mean that businesses will be forced to sell off inventories at discounts, which will lower business profits and be a drag on economic growth in 2023. Nonresidential investment was down 26.7 percent due to the increase in home prices, increased interest rates and a drop in real income. On that last point, real disposable income dropped $1 trillion in 2022, the largest drop since 1932 - the low point of the Great Depression. Personal savings also dropped by $1.6 trillion in 2022. This is a "ticking timebomb" that is not sustainable because it means that consumers are depleting cash reserves. This indicates that spending will continue to slow in 2023 and further stymie economic growth - about two-thirds of GDP is based on consumer spending. Relatedly, the Dow was down 8.8 percent for 2022, the worst year since 2008. 2022 also saw a reduction in the pace of international trade. Imports dropped more than exports which increases GDP, giving the illusion that the economy is better off.
Certainly, 2023 will be another very busy year for rural practitioners and those dealing with legal and tax issues for farmers and ranchers.
January 27, 2023 in Civil Liabilities, Environmental Law, Income Tax, Regulatory Law, Water Law | Permalink | Comments (0)
Wednesday, January 25, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Overview
Today’s article is another installment on what I believe to be the Top 10 developments in agricultural law and agricultural taxation of 2022. Today, I look at developments number four and three.
No. 4– Economic Issues
In general. Economic issues impact daily decision-making for farmers and ranchers. These issues also impact tax and financial planning. During 2022, economic issues impacted farms and ranches to a great degree. Price inflation triggered by economic policies increased the price of fossil fuels which, along with other polices produced wage inflation. In addition, massive deficit spending resulted in a quintupled the money supply which created excess demand that further increased inflation. In addition, poor policy past policy choices by the Federal Reserve kept interest rates at artificially low levels further increasing demand and increasing inflation. Beginning in the first half of 2022, the Federal Reserve started to increase interest rates to decrease demand and reduce inflation. However, further deficit spending by the Congress enacted into law in August of 2022 will largely offset the impact of the Federal Reserve’s interest rate increases with the result that, as of the end of 2022, inflation was anticipated to continue with the possibility of decreased demand, a scenario not unlike the economic situation of the late 1970s.
All of these political/economic choices have implications for farmers and ranchers. Crop production, energy issues, monetary policy, issues in the meat sector, water issues west of the sixth Principal Meridian, and unanticipated outside shocks have farm-level impacts that professional advisors and counselors need to account for when representing farm and ranch clients.
Specific points. Several specific economic points from 2022 are listed below.
- The war in Ukraine has had a major impact on global grain trade and created additional issues for U.S. farmers and ranchers. Russia and Ukraine are leading exporters of food grains. One estimate is that worldwide food and feed prices could rise by 22 percent which could, in turn, cause a surge in malnutrition in developing nations. Since the war started, total world food output has decreased, resulting in a sharp drop in food exports from exporting countries. Other food exporting countries have announced new limitations on food exports (or are exploring bans) to preserve domestic supplies. This will have an impact on international grain markets and will likely have serious implications for the world’s wheat supply. The extent of such disruptions remained unknown at the end of 2022.
- The demand for beef remained strong in 2022. But, a major issue was the disconnect between beef demand and the beef producer. This fact, along with significant drought in much of the major cattle producing areas signaled producers to decrease herd size. During 2022, the Congress was considering legislation focused on providing more robust and transparent marketing of live cattle.
- Pork demand was not as impressive of beef, but improved during 2022. Export demand dropped primarily due to China which cased U.S. pork production to decline along with pork values.
- Poultry, demand remained strong and flock sizes decreased largely because of the presence of Avian Flu. Toward the latter part of 2022, retail egg prices increased substantially.
- Water issues. West of the Sixth Principal Meridian, access to water is critical for the success of many farming and ranching operations. During 2022, a dispute continued to brew between Colorado and Nebraska over water in northeast Colorado that Nebraska lays claim to under a Compact entered into almost 100 years ago. Water access and availability will continue to be key to profitability of farms and ranches in the Plains and the West.
- Land values; machinery and input costs. Farm and ranchland values remained strong during 2022, and input, machinery costs and land values continued to outpace inflation. For those farmers that were able to pre-pay input expenses in 2021 for 2022 crops, much of the price increase of inputs could be blunted until another round of inputs were needed in late 2022 for the 2023 crop. Also, many short-term loans were locked in before interest rates began rising. That story will also likely be different in early 2023 when those loans are redone.
During 2023, the biggest risks to agriculture will continue to be from outside the sector. Unexpected catastrophic events such as the war in Ukraine, whether (or when) China will invade Taiwan, domestic monetary and fiscal policy, political developments at home and abroad, and government regulation of key segments of the economy that impact agricultural activities remain the biggest unknown variables to the profitability of farming and ranching operations and agribusinesses.
No. 3 – Endangered Species Act regulations
In early 2022, the Environmental Protection Agency (EPA) announced a new policy regarding its Endangered Species Act (ESA) responsibilities under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). The ESA requires federal agencies to determine whether an agency action “may affect” any species or habitat protected or designated under the ESA. If an agency determines that the an action is “likely to adversely affect” protected species or habitat, the agency must consult with the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service to determine mitigation measures. The EPA administers the FIFRA, and the EPA now considers practically every decision it makes under FIFRA to require consultation in accordance with the ESA. In late 2022, the EPA published its policy plan focusing on ESA mitigation for FIFRA pesticide registration reviews.
During 2022, additional ESA regulations were changed or modified, many of which will potentially negatively impact agricultural activities on private land. For instance, “habitat” is no longer specifically defined, and the Critical Habitat Exclusion Rule was rescinded. This will make it easier for the USFWS to designate critical habitat for protected species under the ESA. Much critical habitat is on private property. The USFWS also continued the process of revising its Listing Rule.
Upon enactment in 1973, the ESA barred the “taking” of endangered species. The “taking” prohibition only extended to “threatened” species if the Interior Department deemed it necessary and advisable for the conservation of the species. In 1975, the Interior Department, contrary to the statute, issued a “blanket rule” extending the prohibition to all threatened species, unless it adopted a special rule relaxing the prohibition for a particular species. In essence, the blanket rule provided no meaningful distinction between regulations for species that are listed as threatened or endangered.
The Trump Administration restored the ESA’s distinction between the regulation of endangered and threatened species by repealing the blanket rule. The move aligned the practice of the Interior Department with that of the Commerce Department (which manages marines species and never had a blanket rule). The change applied prospectively only, and no species lost any protection due to the change. The restoration of regulatory distinctions between endangered and threatened species is designed to better align the incentives of landowners with the interests of rare species. By repealing the blanket rule, burdens imposed on landowners will increase if species decline and relax as they recover.
While the blanket rule remained in effect during 2022, the USFWS is in the process of rescinding the rule. Expect legal challenges to this action which is contrary to the statute and congressional intent to happen once the rule is formally rescinded.
Conclusion
Next time I will look at developments two and one.
January 25, 2023 in Environmental Law, Regulatory Law | Permalink | Comments (0)
Monday, January 23, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Overview
Today’s article is another installment on what I believe to be the Top 10 developments in agricultural law and agricultural taxation of 2022. Today, I look at developments number six and five.
No. 6 – Caselaw and Legislative Developments on “Ag Gag” Provisions
2022 saw further developments in the courts and in state legislatures involving legislative attempts 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.
In Animal Legal Defense Fund, et al. v. Reynolds, et al., No. 4:21-cv-00231-SMR-HCA (S.D. Iowa. Sept. 26, 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 Court (the same 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 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.
According to the court’s view, it seems practically impossible for farmers to protect their farming operations from those who intend to inflict harm via protected “speech.” Is the court saying that there is a constitutional right to trespass? If so, that is flatly contrary to the recent U.S. Supreme Court opinion of Cedar Point Nursery, et al. v. Hassid, et al., No. 20-107, 2021 U.S. LEXIS 3394 (U.S. Sup. Ct. Jun. 23, 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.
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).
No. 5 – WOTUS Final Rule
On December 30, 2022, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COA). On December 30, 2022, the agencies announced the final "Revised Definition of 'Waters of the United States'" rule which will become effective on March 20, 2023. It represents a “change of mind” of the agencies from the positions that they held concerning a water of the United States (WOTUS) and wetlands from just over three years ago. The bottom line is that the new interpretation is extremely unfriendly to agriculture, particularly to farmland owners in the prairie pothole region of the upper Midwest.
As promised, the Final Rule uses a definition that was in place before 2015 (for purposes of the Clean Water Act) for traditional navigable waters, territorial seas, interstate waters, and upstream water resources that “significantly” affect those waters.
Note: Two joint memos were published with the final rule to set forth the delineation of the implementation of roles and responsibilities between the agencies. One is a joint coordination memo to “ensure accuracy and consistency of jurisdictional determinations under the final rule.” The other is a memo with the USDA to provide “clarity on the agencies’ programs under the Clean Water act and the Food Security Act (Swampbuster).”
Adjacency. The EPA wants to restore the “significant nexus” via “adjacency.” This is a big change in the definition of “adjacency.” It doesn’t mean simply “abutting.” Instead, “adjacent” includes a “significant nexus” and a “significant nexus” can be established by “shallow hydrologic subsurface connections” to the “waters of the United States. A “shallow subsurface connection,” the Final Rule states, may be found below the ordinary root zone (below 12 inches), where other wetland delineation factors may not be present. Frankly, that means farm field drain tile.
Specifically, the Final Rule sets forth two kinds of adjacency: 1) the traditional “relatively permanent” standard; and 2) the “significant nexus” standard. The EPA and the COE say the agencies will not assume that all wetlands in a specific geographic area are similarly situated and can be assessed together on a watershed basis in a significant nexus analysis. But it is clear from the Final Rule that the agencies intend to expand jurisdiction over isolated prairie pothole wetlands using the “significant nexus” standard.
Note: The “significant nexus” can be established via a connection to downstream waters by surface water, shallow subsurface water, and groundwater flows and through biological and chemical connections. The Final Rule states that adjacency can be supported by a “pipe, non-jurisdictional ditch,… or some other factors that connects the wetland directly to the jurisdictional water.” This appears to be the basis for overturning the NWPR. Consequently, the prairie pothole region is directly in the “bullseye” of the Final Rule.
Prior converted cropland. The agencies say the final rule increases “clarity” on which waters are not jurisdictional – including prior converted cropland. This doesn’t make much sense. Supposedly, the agencies are “clarifying” that prior converted cropland, (which is not a water), is not a water, but it somehow could be a water if the agencies had not clarified it? In addition, the burden is placed on the landowner to prove that prior converted cropland is actually prior converted cropland and therefore not a water.
Ditches and drainage devices. The Final Rule is vague enough to give the government regulatory authority over non-navigable ponds, ditches, and potholes.
The U.S. Supreme Court. A case is presently pending before the U.S. Supreme Court involving the definition of a WOTUS. In Sackett v. Environmental Protection Agency, 8 F.4th 1075 (9th Cir. 2021), cert, granted, 142 S. Ct. 896 (2022). The issue in the case is whether the U.S. Circuit Court of Appeals for the Ninth Circuit used the proper test for determining whether wetlands are “waters of the United States” under the CWA. Oral argument occurred in early October of 2022. The Court’s opinion is anticipated sometime before mid-March of 2023, but the issuance of the Final Rule may cause that to be delayed. In any event, the Supreme Court will have the final say on what a WOTUS rather than the COE or the EPA.
Conclusion
Next time I will look at developments four and three.
January 23, 2023 in Environmental Law, Regulatory Law | Permalink | Comments (0)
Saturday, January 21, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Overview
Today I continue the journey through what I believe to be the Top 10 developments in agricultural law and agricultural taxation of 2022. Today, I look at developments number eight and seven.
No. 8 – Dicamba Drift Damage Litigation
Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022)
Damage from the drift of Dicamba has been an issue in certain parts of the country for the past two years. Over that time, I have written on the technical aspects of Dicamba and the underlying problems associated with Dicamba application. In 2022, the Dicamba saga continued with litigation involving Missouri’s largest peach farm.
In Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019), the plaintiff is Missouri’s largest peach farming operation and is located in the southeast part of the state. claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) allegedly conspired to develop and market Dicamba-tolerant seeds and Dicamba-based herbicides. The suit alleged that the two companies collaborated on Xtend (herbicide resistant cotton seed) that was intended for use with a less volatile form of Dicamba with less drift potential. But, as of 2015 neither Monsanto nor BASF had produced the new, less volatile, form of Dicamba. That fact led the plaintiff to claim that the defendants released the Dicamba-tolerant seed with no corresponding Dicamba herbicide that could be safely applied. As a result, the plaintiff claimed, farmers illegally sprayed an old formulation of Dicamba that was unapproved for in-crop, over-the-top, use and was highly volatile and prone to drift. The plaintiff claimed its annual peach crop revenue exceeded $2 million before the drift damage, and an expert at trial asserted that the drift caused the plaintiff to lose over $20 million in profits. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. The plaintiff’s suit also involved claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act (MCPA); civil conspiracy; and joint liability for punitive damages.
Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the MCPA; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the MCPA claims. The trial court noted that civil actions under the MCPA are limited to “field crops” which did not include peaches. The trial court, however, did not dismiss the civil conspiracy claim based on concerted action by agreement, but did dismiss the aiding and abetting portion of the claim because that cause of action is not recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant.
Note: The case went to trial in early 2020 and was one of more than 100 similar Dicamba lawsuits. Bayer, which acquired Monsanto in 2018 for $63 billion, announced in June of 2020 that it would settle dicamba lawsuits for up to $400 million.
At trial, the jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and that both defendants had done so for 2017 to the time of trial. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict considering the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020).
BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million (from $250 million) after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
In Hahn v. Monsanto Corp., 39 F.4th 954 (8th Cir. 2022), reh’g. den., 2022 U.S. App. LEXIS 25662 (8th Cir. Sept. 2, 2022), the appellate court partially affirmed the trial court, partially reversed, and remanded the case. The appellate court determined that the trial court incorrectly instructed the jury to assess punitive damages for Bayer (i.e., Monsanto) and BASF together, rather than separately, and that a new trial was needed to determine punitive damages for each company. Indeed, the appellate court vacated the punitive damages award and remanded the case to the trial court with instructions to hold a new trial only on the issue of punitive damages.
However, the appellate court did not disturb the trial court’s jury verdict of $15 million in compensatory damages. On the compensatory damages issue, the appellate court held that the trial court properly refused to find intervening cause as a matter of law for the damage to the plaintiff’s peaches. On that point, the appellate court determined that the spraying of Dicamba on a nearby farm did not interrupt the chain of events which meant that the question of proximate cause of the damage was proper for the jury to determine. The appellate court also held that the was an adequate basis for the plaintiff’s lost profits because the award was not based on speculation. The appellate court noted that the peach orchard had been productive for decades, and financial statements along with expert witness testimony calculated approximately $20.9 million in actual damages. The appellate court also determined that the facts supported the jury’s determination that the defendants engaged in a conspiracy via unlawful means – knowingly enabling the widespread use of Dicamba during growing season to increase seed sales.
No. 7 – The Misnamed “Inflation Reduction Act”
If ever there has been a deceptively misnamed piece of legislation, this is it. An Act with $750 billion of newly minted money to will not reduce inflation. Words have no meaning. I suppose that we are supposed to believe that the following provisions of the bill will reduce inflation:
- $3 billion for the U.S. Postal Service to buy new electric mail trucks;
- $3 billion for the EPA to oversee block grants for “environmental justice;”
- $40 billion total to the EPA which includes $30 billion for “disadvantaged communities” (keep in mind that the total annual budget of the EPA is about $10 billion);
- $750 million to the Interior Department for new hires;
- $10 million to the USDA to be spent on “equity commissions” to “combat” racism;
- $25 million to the Government Accountability Office to determine, “whether the economic, social and environmental impacts of the funds described in this paragraph are equitable;”
- Via a budget gimmick to keep the amount outside of the Act’s price tag are amounts to the Energy Department for existing “green” energy loan programs and a new energy loan-guarantee program.
Ag Program Spending
The Act contains a great deal of spending on ag conservation-related programs. Here are the primary provisions:
- EQIP - $8.45 billion additional funding over Fiscal Years 2023-2026. Prioritizes funding for reduction of methane emissions from cattle (e.g., cattle passing gas) and nutrient management activities (e.g., diets to reduce bloating in cows).
- CSP - $3.25 billion additional funding over same time frame.
- Ag Conservation Easement Program (ACEP) - $1.4 billion over same time frame for easements or interests in land that will reduce, capture, avoid or sequester carbon dioxide, or methane oxide emissions with land eligible for the program. ACEP incorporates the Wetlands Reserve Program, the Grasslands Reserve Program and the Farm and Ranch Lands Protection Program.
- Regional Conservation Partnership Program - $4.95 billion over same timeframe for cover cropping, nutrient management, and watershed improvement.
- $4 billion for drought relief that prioritizes the CO basin.
- The U.S. Forest Service gets $1.8 billion for hazardous fuels reduction projects on USFS land.
- $14 billion for rural development and lending projects.
- $3.1 billion to USDA to provide payments to distressed borrowers.
- $2.2 billion to USDA for farmers, ranchers and forest landowners that have been discriminated against in USDA lending programs (i.e., reparations).
- $5 billion to USDA for National Forest System to fund forest reforestation and wildfire prevention.
The IRS gets approximately $80 billion in IRS funding (over next 10 years) to hire 87,000 agents. The IRS currently has 78,000 agents, but 50,000 are set to retire in the next few years. $46 billion is to be dedicated to enforcement and is anticipated to increase the number of audits by $1.2 million annually. $25 billion is earmarked for IRS operations, $5 billion for business systems modernization. IRS taxpayer services, which many tax practitioners would say as the most in need of funding, gets the short end of the stick with $4 billion.
Conclusion
I will continue looking at the biggest developments of 2022 in ag law and tax in the next post.
January 21, 2023 in Civil Liabilities, Income Tax, Regulatory Law | Permalink | Comments (0)
Monday, January 16, 2023
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Overview
With this post, I begin the trek through what I believe to be the Top 10 developments in agricultural law and agricultural taxation of 2022. Today, I look at developments No. 10 and nine.
No. 10 – USDA’s Emergency Relief Program
Background. The Extending Government Funding and Delivering Emergency Assistance Act was signed into law on September 30, 2021. This legislation includes $10 billion for farmers impacted by weather disasters during calendar years 2020 and 2021. It directs $750 million to assist livestock producers for losses incurred due to drought or wildfires in calendar year 2021 through the Emergency Livestock Relief Program (ELRP). Through the Emergency Relief Program (ERP), the legislation also provides funding for noninsured crop losses incurred.
The United States Department of Agriculture (USDA) released information in August of 2022 involving the question of whether income from the sale of farm equipment counted as farm income for purposes of the ERP. The issue is an important one because an enhanced payment limit might be at stake.
ERP payments may only be made to a producer with a crop eligible for federal crop insurance or the noninsurance crop disaster assistance program (NAP). The crop for which the recovery is sought must have been subject to a qualifying disaster, which is defined broadly. As a type of qualifying disaster, droughts are rated in accordance with the U.S. Drought Monitor, which publishes a list of qualifying counties.
An ERP payment is not made to any producer that did not receive a crop insurance or NAP payment in 2020 or 2021. Because of this requirement, crop insurance premiums that an ERP recipient has paid are reimbursed by recalculating the ERP payment based on the ERP payment rate of 85% and then backing out the crop insurance payment based on coverage level.
In addition, the ERP requires that the producer receiving a payment obtain either NAP or crop insurance for the next crop years. Also, a producer that received prevented planting payments can qualify for ERP Phase 1 payments based on elected coverage.
Note. ERP payments are for damages occurring in 2020 and 2021, so if they were received in 2022 they are not deferrable to 2023.
Payment limit. The ERP payment limit is $125,000 for specialty crops. For all other crops, ERP imposes a limit of $125,000 combined for ERP Phases 1 and 2. However, for an applicant with “average adjusted gross farm income” (average adjusted gross income (AGI)) based on the immediate three prior years but skipping the first year back (e.g., in 2022, tax years 2018, 2019, and 2020 are used to compute the percentage) that is comprised of more than 75% from farming activities (the “75% test”), the normally applicable $900,000 AGI limit is dropped, and the payment limit goes to $900,000 for specialty crops and $250,000 for all other crops. There are separate payment limits for 2020 and 2021.
Definition of farm income. Farm income for ERP purposes includes the following.
- Net income from Schedule F, Profit or Loss From Farming
- Pass-through income from farming activities
- Wages from a farming entity
- Interest charge domestic international sales corporation (IC-DISC) income from an entity that materially participates in farming (has a majority of gross receipts from farming)
- Income from packing, storing, processing, transporting and shedding of farm products
- Gains from the sale of farm equipment, but only if farm income is at least two-thirds of overall AGI (excluding gains from equipment sales and the sale of farm inputs).
Observation. Under the Tax Cuts and Jobs Act (TCJA), for tax years after 2017, a trade-in of farm equipment is treated as a sale that is reported on Form 4797, Sales of Business Property. As a result, many farmers may have little income reported on Schedule F for a tax year that they incurred a large gain from trading in farm equipment reported as having been sold on Form 4797. Thus, sale of farm equipment could cause such a farmer not to receive an additional ERP payment.
The same rule likely applies to income from custom farming or harvesting services and the income derived from providing seed to farmers (offset by allocated expenses).
No. 9 – Decision to not Review USDA Wetland Certification Upheld
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 with 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. 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. In other years it had to be drained to plant crops. 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.
The plaintiff sought a review of the certification under 16 U.S.C. §3822(a)(4) which provides for review of a final certification upon request by the person affected by the certification. 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.
Note: The trial court’s ruling seems incorrect and the plaintiff docketed an appeal with the U.S. Court of Appeals for the Eighth Circuit on August 16. No. 22-2729. 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.
Conclusion
In the next installment I will look at some more of the Top Ten of 2022.
January 16, 2023 in Environmental Law, Regulatory Law | Permalink | Comments (0)
Saturday, January 14, 2023
Top Agricultural Law and Tax Developments of 2022 – Part 4
Overview
Today’s blog article continues the series that began earlier this week reviewing the top ag law and tax developments of 2022. I am working my way through those developments that were significant, but not quite of national significance to make the “Top Ten” of 2022.
More ag law and tax developments of 2022 – it’s the topic of today’s post.
State Law Allowing Warrantless Searches Unconstitutional
Rainwaters, et al. v. Tennessee Wildlife Resources Agency, No. 20-CV-6 (Benton Co. Ten. Dist. Ct. Mar. 22, 2022)
The Fourth Amendment protects against illegal searches and seizures. In general, government officials must secure a search warrant based on probable cause before searching an area unless the owner gives consent. However, the Fourth Amendment’s protection accorded to “persons, houses, papers and effects,” does not extend to all open areas contiguous to a person’s home, but rather only to the home itself and its surrounding “curtilage” – the area immediately surrounding and associated with the defendant’s home.
The scope and extent of curtilage is an important issue to farming and ranching operations. Farming, hunting, recreational and other activity occurs on private land that is not located in the surrounding vicinity of the home. Indeed, there may not even be a home on the tract. Does that mean that government agents can conduct a warrantless search on such property? The ability to do so has become much easier with the new technological developments.
In addition to the Fourth Amendment protection, in recent years numerous states have enacted legislation designed to provide what is believed to be greater protection from warrantless searches to rural property owners. Sometimes those laws find themselves at odds with other state laws that allow certain government officials access to property to perform “official” duties. Other times, those state laws providing access by government officials without a warrant are challenged as unconstitutional. That is indeed what happened in a Tennessee case in 2022.
In the case, the plaintiffs owned farmland on which they hunted or fished. They marked fenced portions of their respective tracts where they hunted and also posted the tracts as “No Trespassing.” Tennessee Wildlife Resources Agency (TWRA) officers entered onto both tracts on several occasions and took photos of the plaintiffs and their guests without permission or a warrant. Tennessee law (Tenn. Code Ann. §70-1-305(1) and (7)) allows TWRA officers to enter onto private property, except buildings, without a warrant “to perform executive duties.” The TWRA officers installed U.S. Fish & Wildlife Service surveillance cameras on the plaintiffs’ property without first obtaining a warrant to gather information regarding potential violations of state hunting laws. The plaintiffs challenged the constitutionality of the Tennessee law and sought injunctive and declaratory relief as well as nominal damages. The defendants moved for summary judgment arguing that the plaintiffs lacked standing and that there was no controversy to be adjudicated.
The trial court found the Tennessee law to be facially unconstitutional. The trial court noted that the statute at issue reached to “any property, outside of buildings” which unconstitutionally allowed for warrantless searches of a home’s curtilage. The trial court also determined that the officers’ information gathering intrusions were unconstitutional searches rather than reasonable regulations and restrictions, and that the statute was comparable to a constitutionally prohibited general warrant. It was unreasonable for the TWRA officers to enter onto occupied, fenced, private property without first obtaining consent or a search warrant. The trial court also held the plaintiffs had standing to sue because they experienced multiple unauthorized entries onto their private property, and that declaratory relief was an adequate remedy. The trial court awarded nominal damages of one dollar.
Note: The defendant appealed the trial court’s decision. Expect more developments in this case in 2023 as well as additional developments in other states on the warrantless search issue.
IRS Failure to Comply with the Administrative Procedure Act (APA)
Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022); Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022)
Several court decisions in 2022 invalidated IRS action for not following federal law in developing regulations that implement the tax code. For instance, in Mann Construction, the plaintiff challenged IRS Notice 2007–83, which designated certain employee benefit plans featuring cash value life insurance policies as listed transactions.
Note: A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. IRS identifies these transactions by notice, regulation, or other form of published guidance as a listed transaction.
Generally, the Code imposes a 20 percent accuracy-related penalty on a taxpayer who has a “reportable transaction” understatement. The penalty is 30 percent if the taxpayer fails to make certain disclosure requirements that I.R.C. §6011 requires. That Code section imposes a penalty on a person who fails to include information about a reportable transaction on a return. A reportable transaction is one that is the same as or “substantially similar to” a tax avoidance transaction (a.k.a. a “listed transaction”) that the IRS has identified by a Notice, Regulation or some other form of published guidance. Pursuant to IRC §6707A, a failure to report a listed transaction subjects the taxpayer to potential monetary penalties and criminal sanctions.
Note: The minimum penalty for failure to report a listed transaction is $10,000 ($5,000 for a natural person). The maximum penalty is $200,000 ($100,000 for a natural person).
In Mann Construction, the plaintiff had put a cash value life policy plan into effect from the 2013 to 2017 tax years. In 2019, the IRS determined that the plan fit the description identified in Notice 2007–83 and imposed penalties on the plaintiff and its shareholders for failing to disclose their participation. The plaintiff paid the penalties and then sued for a refund alleging that the IRS failed to comply with the notice and comment requirements of the Administrative Procedure Act (APA).
Note: Under the APA, a federal agency must undertake a Notice of Public Rulemaking when developing a legislative rule. The Notice is published in the Federal Register and typically provides 60 days for public comment and 30 days for the agency to reply.
The trial court ruled for the Government. However, the Sixth Circuit reversed, finding that the Notice was invalid because of the APA violation. The IRS argued that it was not required to comply, as the Notice was only an “interpretive rule” and not a “legislative rule.” However, the Sixth Circuit concluded that the Notice fell on the legislative side. This rulemaking imposed new duties on taxpayers that Congress had not articulated. Congress had delegated the authority to the IRS to determine which transactions will be deemed “a tax avoidance transaction,” and the Notice attempted to do that. The mere fact that the statute permitted some interpretation of the term “tax avoidance transaction” did not remove the Notice from the legislative category. Moreover, Congress did not exempt this from the scope of the APA.
The IRS also argued that Treas. Reg. §1.6011-4(b) allowed the IRS to identify reportable and listed transactions “by notice, regulation, or other form of published guidance.” The Court responded that Congress, not the IRS, gets to amend APA requirements.
In Green Valley Investors, LLC, the petitioner claimed charitable contribution deductions for several syndicated conservation easement transactions. Effective December 23, 2016, the IRS had identified all syndicated conservation easement transactions from January 1, 2010, forward (and substantially similar transactions) as “listed transactions.” Notice 2017-10, 2017-4 I.R.B. 544. That designation imposed substantial reporting requirements not only on the participants in such transactions, but also on their material advisors, for as long as the statute of limitations with respect to the transaction remained open. The IRS denied the deductions and imposed various reportable transaction penalties. The petitioner challenged the IRS position on the basis that the IRS failed to comply with the notice-and-comment requirements of the APA. U.S. Tax Court followed the rationale in Mann Construction in holding that Notice 2017-10 was also invalid because of a failure to satisfy the notice and comment requirements of the APA. The Tax Court determined that Notice 2017-10 was a legislative rule because when the IRS identified syndicated conservation easement transactions as a listed transaction it was not merely providing its interpretation of the law or reminding taxpayers of pre-existing duties. Instead, the Tax Court determined, the IRS was imposed new duties in the form of reporting and recordkeeping requirements on taxpayers and their material advisors. These substantive new duties that exposed taxpayer to noncompliance penalties meant that the Notice was a legislative rule subject to the APA’s notice-and-comment requirement.
Note: Also, in CIC Services, Inc. v. Internal Revenue Service, 2022 U.S. Dist. LEXIS 63545 (E.D. Tenn. Mar. 21, 2022), the court invalidated Notice 2016-66, casting doubt on enforcement against micro captive insurance. Likewise, in GBX Assoc., LLC v. United States, 2022 U.S. Dist. LEXIS 206500 (N.D. Ohio Nov. 14, 2022), the federal district court followed Green Valley Investors, Inc. in invalidating Notice 2017-10, but it refused to apply a nationwide injunction to enforcement, binding only the parties and leaving this issue for further judicial development.
These cases invalidating IRS Notices for failure of the agency to follow the APA’s notice-and-comment requirements are important to farmers and ranchers. USDA regulations often shade the line from an interpretive rule into one that is legislative. The cases provide helpful guidance on where that line is located.
Conclusion
I will continue my journey through the top ag law and tax developments of 2022 in my next post.
January 14, 2023 in Income Tax, Regulatory Law | Permalink | Comments (0)
Friday, January 6, 2023
Top Ag Law and Developments of 2022 – Part 2
Overview
Today’s blog article continues the series that began earlier this week reviewing the top ag law and tax developments of 2022. I am working my way through those developments that were significant, but not quite of national significance to make the “Top Ten” of 2022.
More ag law and tax developments of 2022 – it’s the topic of today’s post.
Regulation of Agricultural Activities on Wildlife Refuges
Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022)
This case involves the management of six national wildlife refuges in the Klamath Basin encompassing over 200,000 acres. The court faced the specific question of whether the federal government can regulate agricultural activities on leased land within the refuges. The plaintiffs, an irrigation district and associated agricultural groups, sued the defendant, U.S. Fish and Wildlife Service, claiming the defendant violated environmental laws by regulating leased farmland in the Tule Lake and Klamath Refuge. The trial court granted summary judgment in favor of the defendant. The plaintiffs appealed. The appellate court noted that the Kuchel Act and the Refuge Act allow the defendant to determine the proper land management practices to protect the waterfowl management of the area. Under the Refuge Act, the defendant was required to issue an Environmental Impact Statement (EIS) and Comprehensive Conservation Plan (CCP). The defendant did issue an EIS and CCP for the Tule Lake and Klamath Refuge area, which included modifications to the agricultural use on the leased land within the region. The EIS/CCP required the leased lands to be flooded post-harvest, restricted some harvesting methods, and prohibited post-harvest field work, which the plaintiffs claimed violated their right to use the leased land. The plaintiffs argued that the language, “consistent with proper waterfowl management,” within the Kuchel Act was “nonrestrictive” and was not essential to the meaning of the Act. The appellate court held it was improper to read just that portion of the Act without considering the rest of the Act to understand the intent. The appellate court found the Kuchel Act was unambiguous and required the defendant to regulate the leased land to ensure proper waterfowl management. The Refuge Act allows the defendant to regulate the uses of the leased land, but the plaintiffs argued the agricultural practices were a “purpose” rather than a “use” so the defendant could not regulate it under the Refuge Act. The appellate court found the agricultural activity on the leased land was not a “purpose” equal to waterfowl management. The appellate court also held the language of the Act was unambiguous and determined that agricultural activities on the land were to be considered a use that the defendant could regulate. As such, the conditions needed to benefit waterfowl trumped ag considerations under both the Refuge Act and the Kuchel Act and, as the court stated, if the defendant determined that “an ag use is not consistent with proper waterfowl management, the Service must be allowed to restrict agricultural use. Accordingly, the appellate court affirmed the trial court’s award of summary judgment for the defendant.
Minnesota Farmer Protection Law Upheld
Pitman Farms v. Kuehl Poultry, LLC, et al., 48 F.4th 866 (8th Cir. 2022)
In early 1988, the Minnesota Legislature directed the Minnesota Department of Agriculture (MDA) to put together a task force to study the issue of agricultural contract production and recommend to the legislature how it might provide additional legal and economic protection to contract growers. The MDA’s Final Report was issued in February of 1990. During the 1990 legislative session, the Minnesota legislature approved various economic protections for farmers based on the task force recommendations focusing particularly on parent liability. As signed into law, MN Stat. §17.93 provides as follows:
“Parent company liability. If an agricultural contractor is the subsidiary of another corporation, partnership, or association, the parent corporation, partnership or association is liable to a seller for the amount of any unpaid claim or contract performance claim if the contractor fails to pay or perform according to the terms of the contract.”
In addition, MN Stat. §17.90 specified as follows:
“’Producer” means a person who produces or causes to be produced an agricultural commodity in a quantity beyond the person’s own family use and: (1) is able to transfer title to another; or (2) provides management input for the production of an agricultural commodity.”
The MDA then prepared at “statement of need and reasonableness” (SONAR) to implement the new statutory provision. The SONAR referred to the legislation as the “Producer Protection Act” (PPA) and the MDA’s implementing rule (MN Rule 1572.0040) for MN Stat §17.93 which went into effect on March 4, 1991, read as follows:
“A corporation, partnership, sole proprietorship, or association that through ownership of capital stock, cumulative voting rights, voting trust agreements, or any other plan, agreement, or device, owns more than 50 percent of the common or preferred stock entitled to vote for directors of a subsidiary corporation or provides more than 50 percent of the management or control of a subsidiary is liable to a seller of agricultural commodities for any unpaid claim or contract performance claim of that subsidiary.”
During the same 1990 legislative session the Minnesota legislature approved, and the governor signed into law MN Stat. §27.133. This new law stated as follows:
“Parent company liability. If a wholesale produce dealer is a subsidiary of another corporation, partnership, or association, the parent corporation, partnership, or association is liable to a seller for the amount of any unpaid claim or contract performance claim if the wholesale produce dealer fails to pay or perform in according to the terms of the contract and this chapter.”
Concerning this provision, the legislature stated, “It is therefore declared to be the policy of the legislature that certain financial protection be afforded those who are producers on the farm….”
Also, under both MN Stat. §17.93 and MN Stat. §27.133, “contractor” and “wholesale produce dealer” were defined as “persons” and “person” was to be applied to corporations, partnerships and other unincorporated associations.” MN Stat. §665.44, sub. 7.
In 2017, the defendants entered into chicken production contracts with Prairie’s Best Farm, Inc. to grow chickens in exchange for monthly payments and bi-monthly bonus payments. In late 2017, Simply Essentials bought the assets of Prairie’s Best and assumed the grower contracts. Simply Essentials, incorporated in Delaware and headquartered in California, was the subsidiary of the plaintiff, Pitman Farms, which owned more than 50 percent of Simply Essentials. Shortly thereafter, the plaintiff bought Simply Essentials’ membership interests and became its sole owner. In 2019, Simply Essentials encountered financial trouble, ceased processing activities and notified the defendants that it was terminating the contracts effective three months later. The defendants’ demands for payment in excess of $6 million from the plaintiff for breach of contract failed. Both parties sought a declaratory judgment concerning the application of the PPA to the contracts.
The plaintiff claimed that the PPA did not apply because the defendants were not “sellers” and, even if they were, the PPA didn’t apply because Simply Essentials was an LLC rather than a “corporation, partnership, or association. The plaintiff also asserted that the PPA’s parent company liability provisions didn’t apply to it because Delaware law applied, and that applying Minnesota law would violate the Dormant Commerce Clause. The defendant’s counterclaim made the opposite arguments.
The trial court ruled for the plaintiff, finding that the PPA did not apply by its terms because the defendants were not “sellers” and because Simply Essentials was an LLC rather than a “corporation, partnership, or association.”
On appeal, the appellate court unanimously reversed. The appellate court read the various statutes together to determine the legislature’s purpose and intent. The appellate court noted that the parent company liability statute of MN Stat. §27.133, the PPA of §§17.90-17.98 and the MDA’s implementing rule all arose from the same legislative session, addressed the same issue, and contained nearly identical language. Accordingly, the appellate court determined that the trial court should have looked to MN Stat. §27.133 when construing the meaning of “seller” contained in MN Stat. §17.93 and in MDA Rule 1572.0040. When the various provisions were taken together, the appellate court determined that “seller” can include “producer” under the PPA and the MDA’s implementing regulation.
The appellate court also concluded that the trial court erred in finding that “seller” was limited to transferors of title. Because the defendants did not have title to the chickens and could not therefore transfer title, the trial court held that the PPA did not apply. The appellate court held that such a construction was plainly contrary to the legislature’s intent in creating the PPA which was to provide financial protections to agricultural producers in general and not merely agricultural commodity sellers. Further, because the appellate court determined that “seller” included “producer,” the defendants were covered by the PPA as providing management services in accordance with MN Stat. §17.90 (2) for the growing of the chickens under contract. In addition, the appellate court held that the growers were also “sellers” for purposes of the parent company liability provision of MN Stat. §27.133.
The plaintiff also asserted that “subsidiary of another corporation, partnership or association” contained in MN Stat. §17.93 and §27.133 meant that both the parent and the subsidiary had to be either a corporation, partnership or an association. The trial court agreed with this interpretation. The appellate court also agreed but pointed out that LLCs (which Simply Essentials was) did not exist in Minnesota when the PPA was enacted and, as such, the legislature had not purposefully excluded them from the statute. The appellate court also noted that an LLC had been found to be a “person” for purposes of the Minnesota Human Rights Act. That law defined “person” to include a partnership, association, or corporation. In addition, an unpublished decision of the Minnesota Court of Appeals had previously held that an LLC was an “association” for purposes of a Minnesota oil transportation statute. Thus, there was no apparent reason why the legislature would have singled out LLCs to not be covered under the parent company liability provisions of the PPA.
The appellate court also noted the strong public policy statement of the Minnesota legislature in enacting the PPA – to protect producers of agricultural commodities from economic harm due to parent business entities using their organizational form to avoid liability for their subsidiaries’ actions.
Conclusion
I will continue my journey through the top developments in ag law and tax in a subsequent post.
January 6, 2023 in Contracts, Environmental Law, Regulatory Law | Permalink | Comments (0)
Monday, December 5, 2022
Ag Law Developments in the Courts
Overview
It’s been a while since I did a blog article on recent court developments involving farmers, ranchers rural landowners and agribusinesses. I have been on the road just about continuously for the last couple of months and nine more events remain between now and Christmas. But, let me take a moment today (and later this week) to provide a summary of some recent court cases involving agriculture.
Recent court opinions involving agriculture – it’s the topic of today’s post.
Jumping Mouse Habitat Designation Upheld
Northern New Mexico Stockman’s Association, et al. v. United States Fish and Wildlife Service, 494 F.Supp.3d 850 (D. N.M. 2020), aff’d., 30 F.4th 1210 (10th Cir. 2022)
In 2014, the U.S. Fish and Wildlife Service (USFWS) listed the New Mexico Meadow Jumping Mouse as an endangered species based on substantial habitat loss and fragmentation from grazing, water management, drought and wildfire. Accordingly, in 2016, the USFWS designated 14,000 acres along 170 miles of streams and waterways in New Mexico, Arizona and Colorado as critical habitat for the mouse. The U.S. Forest Service erected fencing around some streams and watering holes in the Santa Fe and Lincoln National Forests that were in the designated area The plaintiffs, two livestock organizations, with members that graze cattle in those national forests, sued in 2018 claiming that the USFWS failed to sufficiently consider the economic impact of the critical habitat designation. The trial court dismissed the case, finding that the USFWS was justified in its decision. The trial court also determined that the USFWS need not compensate the plaintiffs for the reduction in value of the plaintiffs’ water rights. The trial court reasoned that the USFWS need not consider all of the economic impacts associated with the mouse’s listing when designating critical habitat, only the incremental costs of the designation itself. The court cited the nine-month annual hibernation period of the mouse giving it only a short time to breed and gain weight for the winter and, as such, the mouse’s habitat needed to remain ideal with tall, dense grass and forage around flowing streams in the designated area. On appeal, the appellate court affirmed. The appellate court held that the assessment method of the USFWS for determining the economic impacts of the critical habitat designation on the water rights of the plaintiffs’ members was adequately considered, and that the USFWS had reasonably supported its decision not to exclude certain areas from the critical habitat designation.
Court Reduces Dicamba Drift Damage Award; Case Continues on Punitive Damages Issue
Hahn v. Monsanto Co., 39 F.4th 954 (8th Cir. 2022)
The plaintiff claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) conspired to develop and market dicamba-tolerant seeds and dicamba-based herbicides. The plaintiff claimed that the damage to the peaches occurred when dicamba drifted from application to neighboring fields. The plaintiff claimed that the defendants released the dicamba-tolerant seed with no corresponding dicamba herbicide that could be safely applied. As a result, farmers illegally sprayed an old formulation of dicamba herbicide that was unapproved for in-crop, over-the-top, use and was "volatile," or prone to drift. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops. Monsanto moved to dismiss the claims for failure to warn; negligent training; violation of the Missouri Crop Protection Act; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same counts except the claims for failure to warn. The trial court granted the motion to dismiss in part. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the claims based on the Missouri Crop Protection Act, noting that civil actions under this act are limited to “field crops” which did not include peaches. The trial court did not dismiss the civil conspiracy claim based on concerted action by agreement but did dismiss the aiding and abetting portion of the claim because that cause of action is no recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant. Bader Farms, Inc. v. Monsanto Co., et al., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. July 10, 2019). The jury found that Monsanto had negligently designed or failed to warn for 2015 and 2016 and the both defendants had done so for 2017 to the present. The jury awarded the plaintiff $15 million in compensatory damages and $250 million in punitive damages against Monsanto for 2015 and 2016. The jury also found that the defendants were acting in a joint venture and in a conspiracy. The plaintiff submitted a proposed judgment that both defendants were responsible for the $250 million punitive damages award. BASF objected, but the trial court found the defendants jointly liable for the full verdict in light of the jury’s finding that the defendants were in a joint venture. Bader Farms, Inc. v. Monsanto Co., et al., MDL No. 1:18-md-02820-SNJL, 2020 U.S. Dist. LEXIS 34340 (E.D. Mo. Feb. 28, 2020). BASF then moved for a judgment as a matter of law on punitive damages or motion for a new trial or remittitur (e.g., asking the court to reduce the damage award), and Monsanto moved for a judgment as a matter of law or a new trial. The trial court, however, found both defendants jointly liable, although the court lowered the punitive damages to $60 million after determining a lack of actual malice. The trial court did uphold the $15 million compensatory damage award upon finding that the correct standard under Missouri law was applied to the farm’s damages. Bader Farms, Inc. v. Monsanto Co, et al., MDL No. 1:18md2820-SNLJ, 2020 U.S. Dist. LEXIS 221420 (E.D. Mo. Nov. 25, 2020). The defendants filed a notice of appeal on December 22, 2020.
On appeal, the appellate court affirmed the trial court on the causation issue noting that the defendant retained direct contact with the farmers and exercised some degree of control over their actions. As such, the defendant was aware of the foreseeable consequences that could come from not controlling the farmers’ actions more closely. On the compensatory damage issue, the defendant argued that compensatory damages should be measured by the difference in the value of the orchard before and after the damage. The appellate court disagreed, noting that such a calculation only applied when the victim is the owner of the land and not a tenant as was the plaintiff. Thus, compensatory damages were properly measured by lost profits. The defendant argued the damages were speculative, but the court found that Bader Farms had provided years of financial statements to show the usual costs and profits associated with farming the orchard. The appellate court determined that there was no doubt the defendant had full control over the critical aspects of the project. In 2007, BASF had relinquished their rights to the seed technology to the defendant, so they could not control something they had no rights to. The appellate court also affirmed the finding that BASF and Monsanto had engaged in a civil conspiracy by agreeing to sell products unlawfully and enabling the widespread use of a product that was illegal to spray during the growing season. As members of the civil conspiracy, BASF was correctly found to be severally liable for the damages. The appellate court also found that Bader Farms provided clear and convincing evidence that the companies had acted with reckless indifference, but the two had different degrees of culpability. The trial court should have assessed the punitive damages of the Monsanto and BASF separately. Thus, the appellate court affirmed in part and reversed and remanded the punitive damages judgment to the trial court.
Court Decides to Resolve Property Dispute by Requiring Parties to Use the Existing Property Line
Barlow v. Saxon Holdings Trust, No. SD37361, 2022 Mo. App. LEXIS 657 (Mo. Ct. App. Oct. 21, 2022)
The plaintiff and her husband purchased land in 1987 by warranty deed that included the language, “running thence Southwesterly along the fence 40 rods.” At the time the plaintiff purchased the property, a fence that ran north to south existed and the plaintiff believed and acted like she owned the land up to that fence. The defendant purchased the neighboring land in 2011 and executed a warranty deed that included the language, “beginning at the NE corner of the NE ¼ of said Section 23 and running SW 40 rods.” In the spring of 2020, the defendant hired a surveyor who informed the defendant that his property extended onto the plaintiff’s property to the “40-rod line.” The defendant put up an electric fence on the disputed property to claim it. In response the plaintiff hired a surveyor who determined the property line was on the original fence line. The plaintiff sued to quiet title. The trial court found ambiguity between the deeds and resolved the ambiguity in favor of the plaintiff and held the plaintiff had adversely possessed the land. The defendant appealed. The appellate court recognized that the deeds individually did not show patent ambiguity, but the difference between the two on the location of property line did create an ambiguity. The appellate court determined that one way to resolve the ambiguity would be to have the parties continue to occupy the land the way they had in accordance with one of the deeds or constructions. This was the trial court’s approach, and the appellate court affirmed the trial court on this point. The appellate court also noted that the trial court had found the plaintiff’s surveyor credible, and that credibility of a witness was a determination to be left to the trial court’s discretion that the appellate court would not disturb. The appellate court affirmed the trial court’s resolution of the deed in favor of the plaintiff and determined it need not address the adverse possession claim.
Oil and Gas Lease on Disputed Property Invalidates Adverse Possession
Cottrill v. Quarry Enterprises, LLC, No. 2022 CA 00011, 2022 Ohio App. LEXIS 3191 (Ohio Ct. App. Sept. 27, 2022)
The plaintiff claimed that she had successfully adversely possessed the defendant’s property by receiving title to the property in 1971 from her mother and caring for the land by mowing and maintaining it and using it for recreational events for herself and family. The trial court granted summary judgment for the defendant, finding that the plaintiff failed to establish exclusive possession over the land due to an existing oil and gas lease that the defendant had executed. The plaintiff appealed, claiming that the lease did not invalidate her exclusive use. To show exclusive use, the plaintiff did not have to be the only person who used the land but needed to be the only person who asserted their right to possession over the land. The appellate court found that the oil and gas that existed on the property began in 1958. For the entirety of the time that the plaintiff claimed she had adversely possessed the property, the oil and gas company had the right of possession over the land in dispute, invalidating the plaintiff’s claim.
December 5, 2022 in Civil Liabilities, Environmental Law, Real Property, Regulatory Law | Permalink | Comments (0)
Wednesday, October 12, 2022
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Overview
An issue that troubles many farmers and ranchers is the federal government’s regulation of farmland and farming activities. Two primary regulatory agencies are the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE). They have jurisdiction to regulate the “waters of the United States” (WOTUS) and the scope of that jurisdiction has been a big issue for many years and has generated innumerable court decisions.
A recent case involved the issue of the COE deciding not to regulate a wet area on a farm and whether the decision not to exercise jurisdiction was done properly. The court’s decision is instructive on the procedure for determining the existence of a wetland, what “prior converted cropland is” and how the agency should properly decline to regulate
The COE’s regulation of farmland - it’s the topic of today’s post.
Background
Facts of the case. In Hoosier Environmental Council, et al. v. Natural Prairie Indiana Farmland Holdings, LLC, et al., 564 F. Supp. 3d 683 (N.D. Ind. 2021), the defendant acquired farmland to build and operate a concentrated animal feeding operation (CAFO) with over 4,350 dairy cows. The COE inspected the property and concluded that much of the land was not subject to the Clean Water Act. The plaintiffs, two environmental groups sued alleging that the defendant violated the Clean Water Act (CWA) and that the COE’s administrative jurisdictional determination violated the Administrative Procedures Act (APA). The land at issue was drained in the early 1900's via the creation of several large ditches and drainage canals to move surface water into the Kankakee River 9.5 miles downstream. The CAFO was constructed on what had been a lakebed over a century ago, and two of the drainage ditches are on the defendant’s land.
Note: The lake was totally drained in the early 1990s to make farmland. Vested with that is the right to maintain the drain. See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999). It is immaterial what the size of the lake was or whether it was where a marsh was at some time in the past. The land at issue was completely transformed to farmland long before the defendant acquired the land at issue.
The plaintiffs claimed that the defendant filled nearly half a mile of one ditch and installed drainage tile to drain excess water, filled and tiled various lateral ditches attached or near both ditches. After the alterations the plaintiffs contacted the COE to determine if the ditches, lateral ditches and land were subject to federal regulation. The COE investigated and determined that neither the defendant’s land nor the lateral ditches were jurisdictional wetlands but did conclude that the two drainage ditches were jurisdictional.
The plaintiffs sought judicial review of the COE’s determination to not regulate the defendant’s land or lateral ditches. The plaintiff asserted that the defendant’s filling and tiling activities required CWA permits for dredged or fill material, and a pollution discharge permit. The plaintiffs claimed that the manipulation of the hydrology and drainage at the CAFO site would degrade the nature and wildlife areas and waters and diminish their ability to continue using and enjoying them. The plaintiffs also claimed that the COE’s wetland determination was arbitrary and capricious because the agency made its conclusion without relying on the relevant wetland factors articulated in the COE’s technical guidance manuals. The COE asserted that its guidance’s procedures weren’t applicable and that the administrative record supported its decision.
Standing. The court determined that the plaintiffs had standing to sue because their members have been and would continue to be injured by the defendant’s activities, and that the plaintiffs’ restorative activities on an adjacent downstream tract that the plaintiffs’ members use for various recreational activities would be harmed. The court also pointed out that at least three members got their water from downstream private wells. The plaintiffs’ “wetland scientist and drainage expert” provided an opinion that the COE’s decision to not assert jurisdiction and the defendant’s continued hydrological changes to the property would “result in a loss of stream and wetland functions on the dairy’s property that would alter hydrology and water quality downstream within Kankakee Sands.”
The court’s opinion gave no indication of the COE’s response to the opinion of the plaintiffs’ expert. Given the recited facts of the case, hydrologic changes by the dairy’s activities would have no impact on the Kankakee Sands, a nearby 10,000-acre restored tallgrass prairie. The topography shows that the site does not drain onto the Kankakee Sands. Instead, the area drains into the Bogus Island Ditch which is well downstream from the dairy. In addition, state law waste management plans protect the drinking water wells at issue from contamination. Also, there is no public access to the ditches. A “wetland and erosion scientist” directly attributed the consequences of the COE’s decision and the prior and ongoing activities of the dairy to “a loss of stream and wetland functions on the dairy’s property that will alter hydrology and water quality downstream within Kankakee Sands.” But this assertion seems far-fetched. Filling a small ditch that doesn’t drain into the Kankakee Sands will have no material effect.
Note: If the Congress intended this result, then a court could extend standing to environmental groups for drainage improvement projects on agricultural land. However, the Congress did not intend that to occur.
The court stated that the plaintiffs had explained that the dairy’s discharges created “reasonable concerns” and that were “fairly traceable” to the dairy’s actions. However, what the plaintiffs complained about was the filling of a ditch and the replacement of its function with a tile. “Reasonable concerns” are not relevant for a jurisdictional determination. The issue is whether there is a hydrological connection between Kankakee Sands and the ditch fill at the dairy.
What is a “Wetland”?
Before diving into the court’s “analysis,” a brief sidestep is necessary. When the Congress created the CWA, it failed to provide a definition of a “wetland,” instead leaving the matter up to the administrative agencies responsible for implementing the law. Under the COE’s rules, a wetland requires a finding of the presence of hydrophytic vegetation, hydric soil and wetland hydrology under a subject tract’s “normal circumstances.” Under the COE’s initial procedures for delineating a wetland, it must determine that a site has been altered, and determine when the alteration occurred and characterize the land as it existed before the alterations.
“Prior converted cropland” is wetland that was manipulated and cropped before December 23, 1985, which no longer contains key wetland indicators. 33 C.F.R. § 328.3(a)(8); 7 C.F.R. § 12.2(a)(8); COE Regulatory Guidance Letter 90-07 ¶5(a). A “farmed wetland” is a wetland that was manipulated and cropped before December 23, 1985, but which still contains key wetland indicators. 7 C.F.R. § 12.2(a)(4); COE Regulatory Guidance Letter 90-07 ¶5(b). A farmed wetland could still be a jurisdictional wetland, but prior converted cropland is non-jurisdictional. 33 C.F.R. § 328.3(a)(8). Thus, when recent alterations are present on agricultural land, before the COE can decide which delineation methodology to use, a detailed assessment of the changes in the hydrology, vegetation, and soil must occur. However, in this instance, the COE noted that the land in question had been drained nearly 100 years ago and continuously row cropped since 1939 (well before the effective date of the 1985 Farm Bill), its normal circumstance was as farmland that did not contain wetland indicators and was, therefore, non-jurisdictional prior converted cropland. While hydric soil was present, to find a jurisdictional wetland, all three indicators must be present.
Note: In its original version, the COE’s 1987 Manual defined “normal circumstances” as what vegetation is commonly present, not what would exist if the land was not disturbed. This was later changed by “notes” added to the 1987 Manual when the Congress outlawed the 1989 Manual. Those explanatory notes changed “normal circumstances” to mean vegetation that would exist if the land was not disturbed and planted. The COE uses reference sites with similar hydrology and soils. If wetland vegetation exists, the COE assumes that it exists on the disturbed tract. However, hydrology still must be present for a wetland to be deemed to exist (as much as the bureaucracy wishes it did not). B & D Land and Livestock Co. v. Veneman, 231 F. Supp. 2d 895 (N.D. Iowa 2002).
The Court’s Analysis
The primary issue before the court was whether the COE’s determination that the land was prior converted wetland (and therefore not subject to COE regulation) was arbitrary and capricious. The court examined the record to determine if the COE followed its own guidance for delineating wetlands. The court noted that the administrative record lacked any description of the prior drainage system (the series of medial and lateral ditches transecting the property before defendant’s alterations), the defendant’s new drainage system, how these systems were designed to function, and whether they were effective in removing wetland hydrology from the area.
Note: While the plaintiffs made much ado about the COE’s lack of consideration of the hydrology of the land before the farm’s alterations, that is largely an irrelevant point. Famers are entitled to maintain the “wetland and farming regime” on the land and may engage in whatever drainage activities necessary to keep that historic farming activity and production. The land in question had been converted to farmland many decades earlier and had been constantly maintained in that status.
The court examined aerial photographs, noting that there was an absence of data identified in the COE’s “Midwest Supplement” to assess the relevant drainage factors, including how the existing and current drainage systems were designed to function, whether they were effective in removing wetland hydrology from the area, and when any conversion occurred. The absence of these sources, coupled with an absence of any meaningful discussion of the hydrology of the site before the defendant’s alterations, led the court to believe that the COE failed to follow the procedures outlined in its own guidance in deciding the land was prior converted cropland. The COE also reviewed 14 aerial photographs that spanned from 1938 to 2017. Those photos showed the presence of row cropping and offered no evidence of potential wetlands. Relying on aerial photographs, the COE expert’s determination and a determination of the Natural Resources Conservation Service to conclude that wetlands did not exist was certainly appropriate.
Note: In addition, the court’s analysis on this point is suspect. The COE did not need to find and document all three factors. The hydrology had been materially altered to enable consistent row crop farming. In that situation wetland hydrology is not present, and the area in question is not a wetland. As a result, other levees, systems or dams do not alter area hydrology because there is not wetland hydrology present to alter. The court referred to the COE’s 1987 Manual for its conclusion that the COE didn’t follow its own procedures. However, the 1987 Manual was established to evaluate recent alterations to undisturbed wetland. The court incorrectly applied this standard to materially hydrologically altered wetland where the alteration had occurred a century earlier. As such, the land in issue was prior converted wetland. The court incorrectly applied the standards of the 1987 Manual to the facts before it involving alterations that occurred over 100 years ago.
The court also determined that there was no indication in the record that the aerial photographs were used to assess hydrology characteristics of the defendant’s land before alterations were made, how the drainage systems were designed to function, and how effectively and efficiently they could convert land from wetland to upland. Further, the court noted there was also no explanation why the COE skipped these steps. The COE took the position that its review of aerial photographs was sufficient to determine the land’s normal circumstances. The court disagreed, determining that the evidence did not support the COE’s claim that its decision was based on identified relevant factors. Instead, the court concluded that the COE made impermissible post hoc justifications. If reliance on its own manuals was not warranted in this situation, the court stated, the COE needed to provide a rationale. As such, the court determined that the evidence did not support the COE’s argument that its decision was rationally based on the relevant wetland hydrological factors before concluding the land was prior converted cropland. Absent that rationale, the COE’s determination of wetland status of the defendant’s farmland was arbitrary and capricious.
Note: The COE followed its correct procedure in this case contained in the Midwest Supplement and also accepted a prior USDA determination as to the land’s status for federal farm program purposes. The ditches and drains that were legally installed successfully removed wetland hydrology. The COE did not deviate from its own regulatory guidance and procedures, but the court assumed that it did. There was no need for the COE to find and document all three wetland characteristic factors. The elimination of wetland hydrology eliminates the possibility that the land was a wetland.
Concerning the lateral ditch, the plaintiffs claimed that the record did not support the COE’s conclusion that the lateral ditches were irrigation canals that drained uplands and lacked relatively permanent flow. The plaintiffs pointed to a lack of administrative record and the claimed failure of the COE to follow the relevant factors that it lists in its Approved Jurisdictional Determination Form. The court also held that the COE’s finding of non-jurisdiction over the lateral ditches was arbitrary and capricious.
The court remanded the case to the COE conduct a more thorough investigation of the defendant’s tract.
Conclusion
The court’s decision correctly points out that administrative agencies must follow their own rules and procedures in delineating wetlands. Even a finding of non-jurisdiction based on prior converted cropland status must be supported by the administrative record and be sufficient to allow a court to determine that the agency followed the proper process. That much is certainly true. The COE did follow the correct procedure in this case or declined to assert jurisdiction. Unfortunately, the court’s opinion reveals a lack of understanding of the process for delineating wetlands and wetland hydrology. As part of its finding that the COE acted in an arbitrary and capricious manner in reaching its conclusion that the land in issue was prior converted wetland, the court stated that ditches and drainage tile impact hydrology in different ways. This is not correct, and it influenced the court’s conclusion that the COE used an inappropriate delineation methodology without explanation, which was arbitrary. However, ditches and drainage tile lines affect groundwater drawdowns identically based upon depth. Once the COE determined that wetland hydrology wasn’t present, the matter was over. There was no wetland.
Aside from the questionable grant of standing, the court waded deep into a subject that is highly technical and which it did not understand sufficiently to be able to sort out proper wetland delineation procedures. Perhaps the same can be said for the dairy’s lawyers – it’s difficult to imagine how the briefs filed on behalf of the dairy didn’t provide some sort of an indication in the court’s opinion of guidance on how the COE delineates wetlands and that the COE’s decision-making process was not arbitrary and capricious.
For farmers, the case is a frustrating one. At issue was land that had been farmed for over 80 years and the right to continue to farm consistent with the historic drainage of the property was caught up in bureaucratic red tape. The court’s expansive view of standing and lack of understanding of the actual science behind the hydrology and geographic facts of the case created a problem for a dairy operation that should have never happened. What was involved in the case were shallow ditches dug into prior converted wetland. That is an activity that the CWA does not regulate.
October 12, 2022 in Environmental Law, Regulatory Law | Permalink | Comments (0)
Sunday, October 2, 2022
Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs?
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? Another federal court opinion involving one of the Iowa provisions, was recently issued. It does more to cloud the issue for livestock producers.
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, as discussed below, 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. People for the Ethical Treatment of Animals, Inc. v. Stein, 466 F. Supp. 3d 547 (M.D. N.C. 2020).
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. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016). 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:
- 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., No. 4:21-cv-00231-SMR-HCA (S.D. Iowa. Sept. 26, 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 Court (the same 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 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.
According to the court’s view, it seems practically impossible for farmers to protect their farming operations from those who intend to inflict harm via protected “speech.” Is the court saying that there is a constitutional right to trespass? If so, that is flatly contrary to the recent U.S. Supreme Court opinion of Cedar Point Nursery, et al. v. Hassid, et al., No. 20-107, 2021 U.S. LEXIS 3394 (U.S. Sup. Ct. Jun. 23, 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.
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).
A Different Approach?
The appellate courts generally holding 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 such as that of Iowa, Idaho or Kansas, 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
In light of 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.
October 2, 2022 in Regulatory Law | Permalink | Comments (0)
Wednesday, September 14, 2022
Ag Law and Tax Developments
Overview
It’s been a while since I last did an case and ruling update. So, today’s post is one of several that I will post in the coming weeks.
Some recent developments in the courts and IRS – it’s the topic of today’s post.
Retained Ownership of Minable Surface Negates Conservation Easement Deduction
C.C.A. 202236010 (Sept. 9, 2022)
The Chief Counsel’s office of IRS has taken the position that a conservation easement donation is invalid if the donor owns both the surface estate of the land burdened by the easement as well as a qualified mineral interest that has never been separated from the surface estate, and the deed retains any possibility of surface mining to extract subsurface minerals. In that instance, the conservation easement doesn’t satisfy I.R.C. §170(h). The IRS said the result would be the same even if the donee would have to approve the surface-mining method because the donated easement would not be donated exclusively for conservation purposes in accordance with I.R.C. §170(h)(5). The IRS pointed out that Treas. Reg. §1.170A-14(g)(4) states that a donated easement does not protect conservation purposes in perpetuity if any method of mining that is inconsistent with the particular conservation purposes of the contribution is permitted at any time. But, the IRS pointed out that a deduction is allowed if the mining method at issue has a limited, localized impact on the real estate and does not destroy significant conservation interests in a manner that can’t be remedied. Surface mining, however, is specifically prohibited where the ownership of the surface estate and the mineral interest has never been separated. On the specific facts involved, the IRS determined that the donated easement would not be treated at being made exclusively for conservation purposes because the donee could approve surface mining of the donor’s subsurface minerals.
Use of Pore Space Without Permission Unconstitutional
Northwest Landowners Association v. State, 2022 ND 150 (2022)
North Dakota law provides that a landowner’s subsurface pore space can be used for oil and gas waste without requiring the landowner’s permission or the payment of any compensation. The plaintiffs challenged the law as an unconstitutional taking under the Fourth and Fifth Amendments. The trial court held that the law was unconstitutional on its face and awarded attorney’s fees to the plaintiff. On further review, the North Dakota Supreme Court determined that the plaintiffs had a property interest in subsurface pore space and that the section of the law specifying that the landowners did not have to provide consent to the trespassers to use the land unconstitutionally deprived them of their property rights as a per se taking. However, the Supreme Court determined that the section of the law allowing oil and gas producers to inject carbon dioxide into subsurface pore space was constitutional. The Supreme Court upheld the award of attorney fees.
Net Operating Loss Couldn’t Be Carried Forward
Villanueva v. Comr., T.C. Memo. 2022-27
The petitioner sustained a loss from the disposition of a condominium he owned as a rental property. He reported the date of the loss as August 2013, but a mortgage lender had foreclosed on the condo in May 2009 and the taxpayer lost possession on that date. The IRS denied the deduction on the basis that the petitioner had not claimed the loss on either an original or amended return which meant that there was no loss that could be carried forward. The Tax Court agreed with the IRS, noting that the Treasury Regulations for I.R.C. §165 provide that a loss is treated as sustained during the tax year in which the loss occurs as evidenced by a closed and completed transaction and fixed by identifiable events occurring in such taxable year. A loss resulting from a foreclosure sale is typically sustained in the year in which the property is disposed of, and the debt is discharged from the proceeds of the foreclosure sale. Thus, the Tax Court determined that the loss had occurred in 2009 and should have been claimed at that time where it could have then been carried forward.
Overtime Pay Rate Not Applicable to Construction Work on Farm
Vanegas v. Signet Builders, Inc., No. 21-2644, 2022 U.S. App. LEXIS 23206 (7th Cir. Aug. 19, 2022)
The plaintiff, the defendant’s employee, worked overtime in building a livestock fence for the defendant. The defendant refused to pay the plaintiff time and a half for overtime. The plaintiff sued the defendant to recover the extra wages. The defendant’s refusal was based on the plaintiff being an agricultural worker not entitled to overtime. The trial court agreed and dismissed the plaintiff’s claim. The plaintiff appealed. The appellate court looked to the language of 29 U.S.C. § 213(b)(12) and the work of the plaintiff to determine if the plaintiff would be considered an agricultural employee. The appellate court found the plaintiff’s work was carried out as a separately organized activity outside of the defendant’s agricultural operations. The plaintiff worked for the defendant, but he built the fence on his own without any aid from any of the farm employees. The appellate court noted that another indication the work would not be considered exempt is whether farmers typically hire someone out for the work at issue. If so, it could be an indication the work is separate from agricultural work and would qualify for overtime pay. The appellate court found the defendant failed to provide much evidence to show that the plaintiff worked with agricultural employees and did not show the work was commonly done by a farmer. The appellate court also reasoned that just because the plaintiff was given a visa for agricultural work did not mean his work for the defendant was agricultural. The appellate court reversed the trial court’s decision to dismiss the complaint.
Early Distribution “Penalty” is a “Tax” and Does Not Require Supervisor Approval
Grajales v. Comr., No. 21-1420, 2022 U.S. App. LEXIS 23695 (4th Cir. Aug. 24, 2022), aff’g., 156 T.C. 55 (2021)
The petitioner borrowed money from her pension account at age 42. She received an IRS Form 1099-R reporting the gross distributions from the pension of $9,025.86 for 2015. She didn’t report any of the amount as income in 2015. The IRS issued her a notice of deficiency for $3,030.00 and an additional 10 percent penalty tax of $902.00. The parties later stipulated to a taxable distribution of $908.62 and a penalty of $90.86. The petitioner claimed that she was not liable for the additional penalty tax because the IRS failed to obtain written supervisory approval for levying it under I.R.C. §6751(b). The Tax Court determined that the additional 10 percent tax of I.R.C. §72(t) was a “tax” and not an IRS penalty that required supervisor approval before it would be levied. The Tax Court noted that I.R.C. §72(t) specifically refers to it as a “tax” rather than a penalty and that other Code sections also refer to it as a tax. The appellate court affirmed.
U.S. Fish & Wildlife Service Can Regulate Ag Practices on Leased Land
Tulelake Irrigation Dist. v. United States Fish & Wildlife Serv., 40 F.4th 930 (9th Cir. 2022)
The plaintiffs sued the defendant, U.S. Fish and Wildlife Service, claiming the defendant violated environmental laws by regulating leased farmland in the Tule Lake and Klamath Refuge. The trial court granted summary judgment in favor of the defendant. The plaintiff appealed. The appellate court noted that the Kuchel Act and the Refuge Act allow the defendant to determine the proper land management practices to protect the waterfowl management of the area. Under the Refuge Act, the defendant was required to issue an Environmental Impact Statement (EIS) and Comprehensive Conservation Plan (CCP). The defendant did issue an EIS and CCP for the Tule Lake and Klamath Refuge area, which included modifications to the agricultural use on the leased land within the region. The EIS/CCP required the leased lands to be flooded post-harvest, restricted some harvesting methods, and prohibited post-harvest field work, which the plaintiffs claimed violated their right to use the leased land. The plaintiffs argued that the language, “consistent with proper waterfowl management,” within the Kuchel Act was “nonrestrictive” and was not essential to the meaning of the Act. The appellate court held it was improper to read just that portion of the Act without considering the rest of the Act to understand the intent. The appellate court found the Kuchel Act was unambiguous and required the defendant to regulate the leased land to ensure proper waterfowl management. The Refuge Act allows the defendant to regulate the uses of the leased land, but the plaintiffs argued the agricultural practices were a “purpose” rather than a “use” so the defendant could not regulate it under the Refuge Act. The appellate court found the agriculture on the leased land was not a “purpose” equal to waterfowl management. The appellate court also held the language of the act was unambiguous and determined that agricultural activities on the land was to be considered a use that the defendant could regulate. The appellate court affirmed the trial court’s award of summary judgment for the defendant.
Crop Salesman Sued for Ruining Relationship with Landowner
Walt Goodman Farms, Inc. v. Hogan Farms, LLC, No. 1:22-cv-01004-JDB-jay, 2022 U.S. Dist. LEXIS 134192 (W.D. Tenn. Jul. 28, 2022)
The plaintiff, a farm tenant, sued the defendant landlord and a third-party ag salesman. The plaintiff claimed that the salesman wrongly advised the landlord and encouraged the landlord to complain about the plaintiff’s farming practices. Specifically, the plaintiff’s claims against the salesman were for interference with contract, interference with business relationship, and fraud. The salesman moved to dismiss each claim, but the trial court denied the motion with respect to the contract interference and interference with business relationship claims. The trial court, however, dismissed the fraud claim involving the efficacy of corn seed.
Standard Default Interest Rate Not Unconscionable
Savibank v. Lancaster, No. 82880-1-I, 2022 Wash. App. LEXIS 1558 (Wash. Ct. App. Aug. 1, 2022)
The defendant obtained a loan from the plaintiff to purchase his father’s farm before the virus outbreak. The loan agreement stated that the interest rate would increase to 18 percent upon default. The defendant did default when the pandemic hit, and the plaintiff filed a foreclosure and repossession action against the plaintiff. The trial court ruled in favor the plaintiff. The defendant appealed and asserted the 18 percent default interest rate was unconscionable during a pandemic. During the appeal, the defendant claimed the plaintiff should have alerted the defendant to any better loan alternatives but failed to do so. The appellate court, affirmed, finding that the plaintiff had no contractual obligation to make the defendant aware of any better financing agreement. The appellate court also upheld the trial court’s finding that the 18 percent default interest rate was not unconscionable and was common for agricultural loans with other banks in the area. The appellate court also noted that the defendant had the opportunity to consult with a lawyer about the loan terms before signing. The loan terms were standard and straightforward, and the defendant failed to show any evidence as to how the virus caused his default or how it made the default interest rate unconscionable. In addition, the court noted that the defendant had stopped making loan payments before the virus began to impact the United States. The appellate court also held that the defendant failed to provide any evidence for an unconscionability defense.
Conclusion
I’ll post additional developments in a subsequent post.
September 14, 2022 in Civil Liabilities, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)
Sunday, September 11, 2022
September 30 Ag Law Summit in Omaha (and Online)
Overview
On September 30, Washburn Law School with cooperating partner Creighton Law School will conduct the second annual Ag Law Summit. The Summit will be held on the Creighton University campus in Omaha, Nebraska. Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30 and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Developments in agricultural law and taxation. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world. There have been several major developments involving agricultural that have come through the U.S Supreme Court in recent months. I will discuss those decisions and the implications for the future. Several of them involve administrative law and could have a substantial impact on the ability of the federal government to micro-manage agricultural activities. I will also get into the big tax developments of the past year, including the tax provisions included in the recent legislation that declares inflation to be reduced!
Death of a farm business owner. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections. The handling of tax attributes after death will be covered as will some non-tax planning matters when an LLC owner dies. There are also entity-specific issues that arise when a business owner dies, and Prof. Morse will address those on an entity-by-entity basis. The transition issue for farmers and ranchers is an important one for many. This session will be a good one in laying out the major tax and non-tax considerations that need to be laid out up front to help the family achieve its goals post-death.
Governing documents for farm and ranch business entities. After a morning break Dan Waters with Lamson Dugan & Murray in Omaha will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fence law issues. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
Farm economics. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an ag economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? How will the war in Ukraine continue to impact agriculture in the U.S.? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Online. The Summit will be broadcast live online and will be interactive to allow you the ability to participate remotely.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
September 11, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Saturday, September 10, 2022
Minnesota Farmer Protection Law Upheld
Overview
During the farm debt crisis of the 1980s numerous states in the Midwest and Plains enacted law designed to provide legal protection to farmers from various types of economic harm that others caused them. Farmers are also particularly vulnerable to bad political choices. During the 1970s the federal government was encouraging farmers to leverage heavily to expand and plant “fence row to fence row.” Then the Carter Administration made bad economic choices and engaged in a Russian grain embargo. The economy suffered from stagflation and when the newly appointed Federal Reserve Chairman Paul Volcker announced he would “ring inflation out of the economy” by immediately and substantially raising interest rates in late 1979, farmers found themselves with collapsed collateral (land) values, increased debt payments and a decreased ability to continue financing farming operations.
As the 1980s wore on, the structure of agricultural production began changing at an increasing pace. The move was on towards contract production of agricultural production. It had started in the 1970s in the poultry industry but started expanding into hog production. Also, farm input and output markets began consolidating, largely because of lax enforcement of existing competition laws applicable to the agricultural industry. Farmers buy inputs from highly concentrated markets and sell into highly concentrated markets. They face “seller power” when it comes to purchasing inputs and “buyer power” as it relates to selling agricultural commodities.
The Minnesota legislature, in 1990, enacted a set of laws designed to provide economic protection for farmers producing agricultural commodities under contract. Recently, the U.S. Court of Appeals for the Eighth Circuit, in Pitman Farms v. Kuehl Poultry, LLC, et al., No. 21-1113, 2022 U.S. App. LEXIS 25167 (8th Cir. Sept. 8, 2022), said the laws applied to a parent corporation of a subsidiary that had canceled several million dollars’ worth of poultry grower contracts.
The Minnesota Producer Protection Act – it’s the topic of today’s post.
Background
In early 1988, the Minnesota Legislature directed the Minnesota Department of Agriculture (MDA) to put together a task force to study the issue of agricultural contract production and recommend to the legislature how it might provide additional legal and economic protection to contract growers. The MDA’s Final Report was issued in February of 1990. During the 1990 legislative session, the Minnesota legislature approved various economic protections for farmers based on the task force recommendations focusing particularly on parent liability. As signed into law, MN Stat. §17.93 provides as follows:
“Parent company liability. If an agricultural contractor is the subsidiary of another corporation, partnership, or association, the parent corporation, partnership or association is liable to a seller for the amount of any unpaid claim or contract performance claim if the contractor fails to pay or perform according to the terms of the contract.”
In addition, MN Stat. §17.90 specified as follows:
“’Producer” means a person who produces or causes to be produced an agricultural commodity in a quantity beyond the person’s own family use and: (1) is able to transfer title to another; or (2) provides management input for the production of an agricultural commodity.”
The MDA then prepared at “statement of need and reasonableness” (SONAR) to implement the new statutory provision. The SONAR referred to the legislation as the “Producer Protection Act” (PPA) and the MDA’s implementing rule (MN Rule 1572.0040) for MN Stat §17.93 which went into effect on March 4, 1991, read as follows:
“A corporation, partnership, sole proprietorship, or association that through ownership of capital stock, cumulative voting rights, voting trust agreements, or any other plan, agreement, or device, owns more than 50 percent of the common or preferred stock entitled to vote for directors of a subsidiary corporation or provides more than 50 percent of the management or control of a subsidiary is liable to a seller of agricultural commodities for any unpaid claim or contract performance claim of that subsidiary.”
During the same 1990 legislative session the Minnesota legislature approved and the governor signed into law MN Stat. §27.133. This new law stated as follows:
“Parent company liability. If a wholesale produce dealer is a subsidiary of another corporation, partnership, or association, the parent corporation, partnership, or association is liable to a seller for the amount of any unpaid claim or contract performance claim if the wholesale produce dealer fails to pay or perform in according to the terms of the contract and this chapter.”
Concerning this provision, the legislature stated, “It is therefore declared to be the policy of the legislature that certain financial protection be afforded those who are producers on the farm…”.
Also, under both MN Stat. §17.93 and MN Stat. §27.133, “contractor” and “wholesale produce dealer” were defined as “persons” and “person” was to be applied to corporations, partnerships and other unincorporated associations.” MN Stat. §665.44, sub. 7.
Facts of Pitman Farms v. Kuehl Poultry, LLC
In 2017, the defendants entered into chicken production contracts with Prairie’s Best Farm, Inc. to grow chickens in exchange for monthly payments and bi-monthly bonus payments. In late 2017, Simply Essentials bought the assets of Prairie’s Best and assumed the grower contracts. Simply Essentials, incorporated in Delaware and headquartered in California, was the subsidiary of the plaintiff, Pitman Farms, which owned more than 50 percent of Simply Essentials. Shortly thereafter, the plaintiff bought Simply Essentials’ membership interests and became its sole owner. In 2019, Simply Essentials encountered financial trouble, ceased processing activities and notified the defendants that it was terminating the contracts effective three months later. The defendants’ demands for payment in excess of $6 million from the plaintiff for breach of contract failed. Both parties sought a declaratory judgment concerning the application of the PPA to the contracts.
Trial Court Decision
The plaintiff claimed that the PPA did not apply because the defendants were not “sellers” and, even if they were, the PPA didn’t apply because Simply Essentials was an LLC rather than a “corporation, partnership, or association. The plaintiff also asserted that the PPA’s parent company liability provisions didn’t apply to it because Delaware law applied, and that applying Minnesota law would violate the Dormant Commerce Clause. The defendant’s counterclaim made the opposite arguments.
The trial court ruled for the plaintiff, finding that the PPA did not apply by its terms because the defendants were not “sellers” and because Simply Essentials was an LLC rather than a “corporation, partnership, or association.”
Eighth Circuit Opinion
On appeal, the appellate court unanimously reversed. The appellate court read the various statutes together to determine the legislature’s purpose and intent. The appellate court noted that the parent company liability statute of MN Stat. §27.133, the PPA of §§17.90-17.98 and the MDA’s implementing rule all arose from the same legislative session, addressed the same issue, and contained nearly identical language. Accordingly, the appellate court determined that the trial court should have looked to MN Stat. §27.133 when construing the meaning of “seller” contained in MN Stat. §17.93 and in MDA Rule 1572.0040. When the various provisions were taken together, the appellate court determined that “seller” can include “producer” under the PPA and the MDA’s implementing regulation.
The appellate court also concluded that the trial court erred in finding that “seller” was limited to transferors of title. Because the defendants did not have title to the chickens and could not therefore transfer title, the trial court held that the PPA did not apply. The appellate court held that such a construction was plainly contrary to the legislature’s intent in creating the PPA which was to provide financial protections to agricultural producers in general and not merely agricultural commodity sellers. Further, because the appellate court determined that “seller” included “producer,” the defendants were covered by the PPA as providing management services in accordance with MN Stat. §17.90 (2) for the growing of the chickens under contract. In addition, the appellate court held that the growers were also “sellers” for purposes of the parent company liability provision of MN Stat. §27.133.
The plaintiff also asserted that “subsidiary of another corporation, partnership or association” contained in MN Stat. §17.93 and §27.133 meant that both the parent and the subsidiary had to be either a corporation, partnership or an association. The trial court agreed with this interpretation. The appellate court also agreed but pointed out that LLCs (which Simply Essentials was) did not exist in Minnesota when the PPA was enacted and, as such, the legislature had not purposefully excluded them from the statute. The appellate court also noted that an LLC had been found to be a “person” for purposes of the Minnesota Human Rights Act. That law defined “person” to include a partnership, association, or corporation. In addition, an unpublished decision of the Minnesota Court of Appeals had previously held that an LLC was an “association” for purposes of a Minnesota oil transportation statute. Thus, there was no apparent reason why the legislature would have singled out LLCs to not be covered under the parent company liability provisions of the PPA.
The appellate court also noted the strong public policy statement of the Minnesota legislature in enacting the PPA – to protect producers of agricultural commodities from economic harm due to parent business entities using their organizational form to avoid liability for their subsidiaries’ actions.
Conclusion
The farm debt crisis of the 1980’s produced legislative efforts in numerous states to address the legal and economic plight of farmers. Over 30 years later, it’s refreshing to see how one of those laws has worked to protect farmers under chicken production contracts. Other states without such protections for farmers should take note of the Eighth Circuit’s opinion.
September 10, 2022 in Contracts, Regulatory Law | Permalink | Comments (0)
Monday, September 5, 2022
Bibliography – January through June of 2022
Overview
Periodically I post an article containing the links to all of my blog articles that have been recently published. Today’s article is a bibliography of my articles from the beginning of 2022 through June. Hopefully this will aid your research of agricultural law and tax topics.
A bibliography of articles for the first half of 2022 – it’s the content of today’s post.
Bankruptcy
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Other Important Developments in Agricultural Law and Taxation
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
Business Planning
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Intergenerational Transfer of the Farm/Ranch Business – The Buy-Sell Agreement
IRS Audit Issue – S Corporation Reasonable Compensation
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
Durango Conference and Recent Developments in the Courts
Civil Liabilities
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Agritourism
https://lawprofessors.typepad.com/agriculturallaw/2022/03/agritourism.html
Animal Ag Facilities and the Constitution
When Is an Agricultural Activity a Nuisance?
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Contracts
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Cooperatives
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Criminal Liabilities
Animal Ag Facilities and the Constitution
Is Your Farm or Ranch Protected From a Warrantless Search?
Durango Conference and Recent Developments in the Courts
Environmental Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
“Top Tan” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 3) – New Regulatory Definition of “Habitat” under the ESA
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
Estate Planning
Other Important Developments in Agricultural Law and Taxation
Other Important Developments in Agricultural Law and Taxation (Part 2)
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Family Settlement Agreement – Is it a Good Idea?
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Proposed Estate Tax Rules Would Protect Against Decrease in Estate Tax Exemption
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Ag Law (and Medicaid Planning) Court Developments of Interest
Joint Tenancy and Income Tax Basis At Death
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Income Tax
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Purchase and Sale Allocations Involving CRP Contracts
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What’s the Character of the Gain From the Sale of Farm or Ranch Land?
Proper Tax Reporting of Breeding Fees for Farmers
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Expense Method Depreciation and Leasing- A Potential Trap
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
income Tax Deferral of Crop Insurance Proceeds
What if Tax Rates Rise?
https://lawprofessors.typepad.com/agriculturallaw/2022/03/what-if-tax-rates-rise.html
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
IRS Audit Issue – S Corporation Reasonable Compensation
Missed Tax Deadline & Equitable Tolling
https://lawprofessors.typepad.com/agriculturallaw/2022/04/missed-tax-deadline-equitable-tolling.html
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Joint Tenancy and Income Tax Basis At Death
Tax Court Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2022/05/tax-court-caselaw-update.html
Deducting Soil and Water Conservation Expenses
Correcting Depreciation Errors (Including Bonus Elections and Computations)
When Can Business Deductions First Be Claimed?
Recent Court Decisions Involving Taxes and Real Estate
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
Tax Issues with Customer Loyalty Reward Programs
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal with Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Animal Ag Facilities and the Constitution
Recent Court Decisions Involving Taxes and Real Estate
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Tax Deal Struck? – and Recent Ag-Related Cases
Regulatory Law
The “Almost Top 10” of 2021 (Part 5)
https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-10-of-2021-part-5.html
The “Almost Top 10” of 2021 (Part 6)
https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-6.html
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Animal Ag Facilities and the Constitution
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Secured Transactions
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
Water Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Durango Conference and Recent Developments in the Courts
September 5, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Tuesday, August 23, 2022
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Overview
The Extending Government Funding and Delivering Emergency Assistance Act (P.L. 117-43) (Act) was signed into law on September 30, 2021. The Act includes $10 billion for farmers impacted by weather disasters during calendar years 2020 and 2021. $750 million is to be directed to provide assistance to livestock producers for losses incurred due to drought or wildfires in calendar year 2021 (the Emergency Livestock Relief Program – (ELRP)).
USDA continues to release information about the ERP. One bit of information came out last week and it involved the question of whether income from the sale of farm equipment counted as farm income for purposes of the ERP. It was not the answer we were hoping for.
The ERP and the definition of farm income (among other aspects of the program) – it’s the topic of today’s post.
In General
Livestock provisions. To receive a Phase 1 payment, a livestock producer must have suffered grazing losses in a county rated by the U.S. Drought Monitor as having a severe drought) for eight consecutive weeks or at least extreme drought during the 2021 calendar year been approved for the 2021 Livestock Forage Relief Program (LFP). Those who would have normally grazed on federal but couldn’t be due to drought are eligible for a Phase 1 payment if they were approved for a 2021 LFP. Various FSA Forms will need to be submitted.
ELRP Payment Calculation – Phase One
Payments are based on livestock inventories and drought-affected forage acreage or restricted animal units and grazing days due to wildfire reported on Form 2021 CCC-853. A payment will equal the producer’s gross 2021 LFP calculated payment multiplied by 75% and will be subject to the $125,000 payment limitation.
Crop insurance (or NAP) requirement. In late 2021, the USDA provided some guidance to producers impacted by various weather-related events. The former Wildfire and Hurricane Indemnity Program (WHIP+) was retooled and renamed as the ERP. ERP will have two payments – two phases. Phase 1 is presently underway, and Phase 2 may not happen until 2023. ERP payments may be made to a producer with a crop eligible for crop insurance or noninsurance crop disaster assistance (NAP) that is subject to a qualifying disaster (which is defined broadly) and received a payment. Droughts (a type of qualifying disaster) are rated in accordance with the U.S. Drought Monitor, where the qualifying counties can be found.
To reiterate, an ERP payment will not be made to any producer that didn’t receive a crop insurance or NAP payment in 2020 or 2021. Because of this requirement, crop insurance premiums that an ERP recipient has paid will be reimbursed by recalculating the ERP payment based on the ERP payment rate of 85 percent and then backing out the crop insurance payment based on coverage level.
In addition, the ERP requires that the producer receiving a payment obtain either NAP or crop insurance for the next crop years. Also, a producer that received prevented planting payments can qualify for Phase 1 payments based on elected coverage.
Note: ERP payments are for damages occurring in 2020 and 2021 – so they are not deferable.
Computation of Payment and Limits
Once a producer submits their data to the FSA, an ERP application will be sent out for the producer to verify. Applications started going out to producers in late May. An ERP payment replaces the producer’s elected crop insurance coverage. It’s based on a percentage with the total indemnity paid using the recalculated ERP percentage with any crop insurance or NAP payment subtracted.
Payment limit. The ERP payment limit is $125,000 for specialty crops. For all other crops, its $125,000 combined. However, for an applicant with “average farm adjusted gross income” (average AGI) based on the immediate three prior years but skipping the first year back that is comprised of more than 75 percent from farming activities, the normally applicable $900,000 AGI limit is dropped, and the payment limit goes to $900,000 for specialty crops and $250,000 for all other crops. There is separate payment limit for each of 2020 and 2021.
Note: ERP payments for “historically underserved producers” will be enhanced by an extra 15 percent. Such producers include beginning farmers, veterans and “socially disadvantaged producers.”
Definition of farm income. Farm income for ERP purposes includes net Schedule F income; pass-through income from farming activities; wages from a farming entity; IC-DISC income from an entity that materially participates in farming (has a majority of gross receipts from farming). Also counting as farm income for ERP purposes is income from packing, storing, processing, transporting and shedding of farm products. Gains from the sale of farm equipment count if farm income is at least two-thirds of overall AGI (excluding gains from equipment sales and the sale of farm inputs).
Note: Under the Tax Cuts and Jobs Act (TCJA) for tax years after 2017, a “trade-in” of farm equipment is treated as a sale that is reported on Form 4797. As a result, many farmers may have little income reported on Schedule F for a tax year that they incurred a large gain from “trading in” farm equipment that is reported on Form 4797. This could cause such a farmer to not receive an additional ERP payment.
It is likely that the same rule will apply to income from custom farming or harvesting services as well as income derived from providing seed to farmers (offset by allocated expenses).
Average AGI is “comparable to the net income from farming and related operations.” FSA Handbook, 6-PL. This requires a determination of what qualifies as gross farm income from which net income from farming operations, or average AGI, can be derived.
Note: Loss years can be used in the AGI calculation. If negative farm AGI is greater than total negative AGI by at least 75 percent, the farmer qualifies. In addition, the three-year computation is simply the applicant’s net income from farming compared with all of the applicant’s other sources of income as reported on the tax return.
If an enhanced payment limit is sought on behalf of an entity, “all members of the entity must complete Form FSA-510 and provide the required certification according to their direct attributions of 7 C.F.R. 1400.105.” This requires that the each of entity owners, up to four levels, also satisfy the more than 75 percent test. For this purpose, wages the entity pays counts as farm income. If one or more owners fails to satisfy the test, the extra payment limit is reduced by the disqualified owner(s) share(s), but there is no reduction to the original payment limit. Wages and dividends paid by a materially participating farm corporation qualifies as farm income. For this purpose, a materially participating farm corporation is one with more than 50 percent of gross receipts from farming. If an entity has not been in existence for the three years for which average AGI is computed, AGI from processor entities can be used.
Example: Able Farm Co. is eligible for $300,000 of ERP related to crop insurance proceeds on account of drought damage to the farm’s 2021 wheat crop. All of Able Farm Co.’s income is derived from farming. Able Farm Co. is eligible for an original payment limit of $125,000 of ERP payments and could receive another $175,000 of the $250,000 additional payment limit depending on the facts. Assume that Able Farm Co. has four shareholders. Two of the shareholders that own 50 percent of Able Farm Co. actively farm and receive wages and dividends from the company. They also rent land to the corporation. Assume that their farm income meets the 75 percent of overall AGI test. Conversely, the other two shareholders that also own 50 percent of Able Farm Co. are not involved in Able Farm Co.’s farming operations, have off-farm wages, and don’t satisfy the 75 percent test. Their failure to meet the 75 percent test individually means that the additional $250,000 payment will be reduced by 50 percent ($250,000 - $125,000 = $125,000. Thus, Able Farm Co. will receive $250,000 of ERP payments ($125,000 + $125,000).
Example: SunGro Cherry Farm qualifies for $950,000 of ERP because of weather damage to its cherry crop. SunGro is owned equally by four owners, two of which meet the 75 percent test. SunGro is eligible for the original payment limit of $125,000 and an additional payment limit of $775,000 ($900,000 - $125,000). But, the additional payment limit must be reduced by the 50 percent ownership of the shareholders that don’t meet the 75 percent test. Thus, the total ERP payment that SunGro Cherry Farm will receive is $125,000 + (.5 x $775,000) = $512,500.
Certification. To get the enhanced payment limit, a CPA or attorney must prepare a letter to be submitted with Form FSA-510 certifying that the applicant’s AGI is over the 75 percent threshold. The FSA has a Form letter than can be used for this that is contained in its Handbook. The FSA 6-PL, Apr. 29, 2022, Para. 489 discusses the 75 percent test and pages 8-73 through 8-74 is where the sample letter is located. The “certification” may allow married farmers to eliminate the off-farm income of a spouse and make it possible to meet the 75 percent test if it otherwise would not be met.
Note: An attorney may sign Form FSA-510, but a CPA should write the letter that FSA provides in the FSA Handbook, 6-P, pages 8-73 and 8-74.
Conclusion
The ERP is complicated and has a non-accounting measure of AGI in certain situations. In addition, the exclusion of gains from equipment “trades” does not take into account the TCJA change on the matter. Close monitoring of the USDA/FSA website and amendments to the 6-PL is a must.
August 23, 2022 in Income Tax, Regulatory Law | Permalink | Comments (0)
Saturday, August 20, 2022
Ag Law Summit
Overview
Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30, and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Survey of ag law and tax. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world.
Tax issues upon death of a farmer. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections.
Farm succession planning drafting language. After a morning break Dan Waters, and estate planning attorney in Omaha, NE, will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fences and boundaries. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
The current farm economy and future projections. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
August 20, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Friday, August 12, 2022
Federal Farm Programs: Organizational Structure Matters – Part Three
Overview
In this final part of a three-part series on federal farm programs, the focus is on the “active personal management,” issues associated with maintaining good records, and planning implications for farms seeking to maximize payments.
Organizing the farm business with federal farm program payments in mind – it’s the topic of today’s post.
The Active Personal Management Requirement
Three-part test for "active engagement." Under 7 C.F.R. Part 1400, a person must be “actively engaged” in farming to receive farm program payments. To satisfy the “actively engaged in farming” test, three conditions must be met.
- The individual's or entity's share of profits or losses from the farming operation must be commensurate with the individual's or entity's contribution to the operation.
- The individual's or entity's contributions must be “at risk.”
- An individual must make a significant contribution of land, capital or equipment (the “left-hand” requirement) and active personal labor or active personal management (i.e., the “right-hand” requirement).
For a general partnership, each member is treated separately for purposes of the active engagement test. Thus, each partner with an ownership interest must contribute active personal labor and/or active personal management to the farming operation on a regular basis. It is also important that the contribution be identifiable and documentable, as well as separate and distinct from the contributions made by any other partner. Any partner that fails to meet the active engagement requirement criteria is not eligible to participate in the federal farm programs.
Note: The payment of a guaranteed payment (i.e., “salary”) to a partner for providing active labor or management can bar the recipient partner from qualifying for payments. A guaranteed payment for services could mean that the partner does not satisfy the requirement of having made a qualified contribution of active labor or management and may disqualify the partner for a payment.
As noted above, a corporation is treated as a “person” for payment limitation purposes that is eligible for a single payment limit if each member with an ownership interest in the corporation makes a significant contribution of active personal labor or active personal management. In the context of a corporation, it does not matter if a member is compensated for contributions of active personal labor or management. But, it is still required that management or labor be performed on regularly, be identified and be documented. A shareholder’s contribution of labor or management must also be separate and distinct from the contributions of other shareholders or members. In addition, the contribution of all corporate members must be significant and commensurate with contributions to the farming operation.
If any member of the corporation fails to meet the labor or management contribution requirements, any program payment or benefit to the corporation will be reduced by an amount commensurate with the ownership share of that member. An exception applies if (a) at least 50% of the entity’s stock or units is held by members that are “actively engaged in providing labor or management” and (b) the total annual farm program payments received collectively by the stockholders or members of the entity are less than one payment limitation.
Note: A corporation can pay a salary to owners.
Some farming operations are placed in trust for estate planning and business succession planning purposes. For purposes of the farm programs, a revocable trust is treated as the grantor. An irrevocable trust must satisfy the same requirements as does a decedent’s estate. In addition, the interest of the beneficiaries of an irrevocable trust that provide active labor or management must be at least half of the trust’s income interest.
Note: While a revocable trust need not obtain an employer identification number (EIN), an irrevocable trust must do so. Additionally, trusts must provide a tax identification number and in some cases this will come up with FSA in the context of a joint revocable trust where both spouses, as income beneficiaries are seeking program benefits.
A decedent’s estate can meet the active engagement test for two program years after the year of the decedent’s death if the estate makes a significant contribution of land, capital equipment (or a combination thereof). The executor or the heirs collectively must make a significant contribution of active personal labor or active personal management (or a combination thereof) to the farming business. The estate must also satisfy the profit (or loss) sharing rule and at-risk rule must also be satisfied. If the estate remains open for more than two program years post-death, the FSA must be satisfied that the estate remains open for reasons other than to receive program payments.
One spouse’s satisfaction of the active engagement test requirement allows the other spouse to meet the test. If the non-participating spouse meets the ownership requirement with respect to land capital or equipment.
If a child under age 18 as of June 1 of a program year receives payments, the payment are attributed to the child’s parent (or a person appointed by a court). A child under age 18 that is farming on their own is not subject to this rule (if certain other requirements are satisfied).
As for the requirement that a capital contribution be made, the contributed capital must come from a fund or account that is separate and distinct from any other person or entity that has an interest in the farming operation. The source of the capital can be via either a direct contribution of cash or the funds may be borrowed (carefully). For contributions that derive from borrowed funds, the funds must not be a result of any loan that is made to or guaranteed by or co-signed by or secured by any other person, legal entity or joint operation that has an interest in the farming operation and the other person (or entity) must not have such an interest.
Note: Cross-collateralization clauses are frequently encountered in the ag borrowing context. John Deere in particular has a rather egregious clause (from a farm borrower’s perspective) as does the Small Business Administration. Those clauses will likely not be waived. Similarly, security and guarantee clauses will likely not be waived. A solution might be to put both the farm operating entity and the farmland into a general partnership (with each partner in an entity that limits liability).
What is "management“? Active personal management” is defined as significant contributions of management activities that are performed on a regular, continuous and substantial basis to the farming operation – basically the I.R.C. §1402 test for self-employment tax purposes. In addition, the management activities must represent at least 25 percent of the total management time that is necessary for the success of the farming operation on an annual basis, or represent at least 500 hours of specific management activities annually.
Multiple “person” determinations? The rules also restrict the number of persons that may qualify for payment by making a significant contribution of active personal management. For this purpose, the limit is one person unless the farming operation is large or complex. A "large" farming operation is one that has crops on more than 2,500 acres (planted or prevented from being planted). If the acreage limitation is satisfied, an additional person may qualify upon making a significant contribution of active personal management. If the farming operation satisfies another test of being “complex,” an additional payment limit may be available. This all means that, for large and complex, farming operations, a total of three payment limits may be obtained. The determination of whether a farming operation is "complex" is made by the State FSA Committee.
Special rules. Special rules apply to tenant-operated farms and family-owned operations with multiple owners. In some situations, a person meeting specified requirements is considered to be actively engaged in farming in any event. For example, a crop-share or livestock-share landlord who provides capital, equipment or land as well as personal labor, or active personal management meets the test. But, a cash rent landlord does not meet the test nor does a crop share landlord is if the rent amount is guaranteed. Also, if one spouse meets the active engagement test, the other spouse is deemed to meet the test.
Exemption for family operations. The active personal management test applies to non-family general partnerships and joint operations that seek to qualify more than one farm manager based solely on providing management or a combination of management and labor (another rule). However, it does not apply to farming operations where all of the partners, stockholders or persons with an ownership interest in the farming operation (or any entity that is a member of the farming operation) are “family members.” For this purpose, “family member” means a person to whom another member in the farming operation is related as a lineal ancestor, lineal descendant, sibling, spouse or otherwise by marriage. Legally adopted children and step-children count as “family members.”
The rule also doesn’t come into play where only one person attempts to qualify under the rule or when combined with a contribution of labor. The rule also doesn't apply to farming operations that are operated by individuals or entities other than general partnerships or joint ventures.
Record-Keeping Requirements
When multiple payments are sought for a farming operation under the active management rule, the operation must maintain contemporaneous records or logs for all persons that make any contribution of management. Those records must include, at a minimum, the location where the management activity was performed, and the amount of time put into the activity and its duration. In addition, every legal entity that receives farm program payments must report to the local FSA committee the name and social security number of each person who owns, either directly or indirectly, any interest in the entity. Also, the entity must inform its members of the payment limitation rules.
The FSA Handbook (5-PL, Amendment 3) specifies that the farming operation must maintain contemporaneous records or logs for all persons that make management contributions. The records must provide: (1) the location (either on-site or remote) where the management activity was performed; (2) the time spent on the activity and the timeframe in which it occurred; and (3) a description of the activity. FSA Handbook, Paragraph 222A. It is important that the records be maintained and be timely made available to the FSA for their review upon request. FSA Handbook, Paragraph 222B. The FSA provides a Form (CCC-902 MR) to track and maintain all of the necessary information. Note that these are the present references to the applicable FSA Handbook Paragraphs and Form. Those paragraph references and Form numbers can change. FSA modifies its handbook frequently; Forms are modified and numbers often are changed. Practitioners and their farm clients must be diligent in monitoring the changes.
Two things happen if the necessary records aren’t maintained – (1) the person’s contribution of active personal management for payment eligibility purposes will be disregarded; and (2) the person’s payment eligibility status will be re-determined for that particular program year.
Planning Implications
The “substantive change” rule. In general, any structural change of the farming or ranching business that increases the number of payment limits must be bona fida and substantive and not a “scheme or device.” See, e.g., Val Farms v. Espy, 29 F.3d 1570 (10th Cir. 1994). In addition, reliance on the advice of local or state USDA officials concerning the payment limitation rules is at the farmer or rancher's own risk. But the substantive change rule does not apply to spouses. Thus, for example, a spouse of a partner that is providing active management to a farm partnership can be added to the partnership and automatically qualify as a partnership member for FSA purposes. However, a “substantive change occurs when a “family member” is added to a partnership unless the family member also provides management or labor.
Note: As s farming operation grows and want to add substantially more acres, consideration may need to be given to the creation of an additional entity. One approach might be to put all of the farming entities into a general partnership with the “farmer” as the general partner.
"Scheme or device." The USDA is adept at alleging that a farming operation has engaged in a "scheme or device" that have the purpose or effect of evading the payment limitation rules. But this potential problem can be avoided if multiple payments are not sought, such as by having one manager for each entity engaged in farming. Of course, this is not a concern if all of the members of a multi-person partnership are family members. If non-family members are part of the farming operation, perhaps they can farm individually or with other non-family members that can provide labor to the farming business. That might be a safe approach.
"Combination" rule. There is also a “combination” rule that can apply when the farming business is restructured. If the rule applies, it will result in the denial of separate “person” status to “persons” who would otherwise be eligible for a separate limit.
Entity type based on size. From an FSA entity planning standpoint, the type of entity structure utilized to maximize payment limits will depend on the size/income of the operation.
For smaller producers, entity choice for FSA purposes is largely irrelevant. Given that the limitation is $125,000 and that payments are made either based on price or revenue (according to various formulas), current economic conditions in agriculture indicate that most Midwestern farms would have to farm somewhere between 3,000 and 4,000 acres before the $125,000 payment limit would be reached. Thus, for smaller producers, the payment limit is not likely to apply and the manner in which the farming business is structured is not a factor.
For larger operations, the general partnership or joint venture form is likely to be ideal for FSA purposes. If creditor protection or limited liability is desired, the partnership could be made up of single-member LLCs. For further tax benefits, the general partnership’s partners could consist of manager-managed LLCs with bifurcated interests.
Conclusion
Farm program payment limitation planning is a complicated mix of regulatory and administrative rules and tax/entity planning. It’s not an area that a producer should engage in without counsel if maximizing payments in conjunction with an estate/business plan is the goal. Unfortunately, few practitioners are adept at navigating both the tax planning rules and the FSA regulatory web. This makes it important that professionals advising farm clients on farm business organization and the associated tax rules work as a team to produce the best result for clients.
August 12, 2022 in Business Planning, Regulatory Law | Permalink | Comments (0)
Tuesday, August 9, 2022
Federal Farm Programs: Organizational Structure Matters – Part Two
Overview
In Part One of this series earlier this week, I provided background on the basics of federal farm programs and how those benefits can be obtained. The structure question bears on the amount of payments that can be obtained. In today’s Part Two I dive into the monetary limits and the adjusted gross income limitation that applies. That involves a discussion of the attribution rule, the definition of a person and the “separate and distinct” requirement.
Part Two of a Three part series on federal farm programs and the structure of the farm business – today’s post continues the discussion.
Monetary Limit
As previously noted, the Farm Bill established a payment limit of $125,000 per person or legal entity (excluding general partnerships and joint ventures). This is the general rule. Peanut growers are allowed an additional $125,000 payment limitation, and the spouse of a farmer is entitled to an additional $125,000 payment limit if the spouse is enrolled at the local Farm Service Agency (FSA) office. The limit applies to all PLC, ARC, marketing loan gains, and loan deficiency payments.
Note: A farmer that files a tax return as married filing jointly can potentially double the payment limit. Indeed, in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA and WI) each spouse typically reports exactly one-half of the joint income on a separate return. This makes each spouse potentially eligible to receive payments, subject to the $900,000 AGI limit. In separate property states, the $900,000 limit could come into play more often. Also, if a joint return exceeds the AGI limits, a certification statement from a CPA or an attorney can be provided that specifies the manner in which income would have been declared and reported had the spouses filed two separate tax returns. The statement must also certify that the total allocations of income are consistent with the information that supports the filed joint tax returns.
The payment limit is applied at both the entity level (for entities that limit liability) and then the individual level (up to four levels of ownership). Thus, general partnerships and joint ventures have no payment limits. Instead, the payment limit is calculated at the individual level. However, an entity that limits the liability of its shareholders/members is limited to one payment limitation. That means that the single payment limit is then split equally between the shareholders/members.
The AGI Limitation
To be eligible for a payment limit, an AGI limitation must not be exceeded. That limitation is $900,000, and applies to commodity programs, conservation programs and disaster programs.
The AGI limitation is an average of the three prior years, with a one-year delay. In other words, farm program payments received in 2022 are based off the average of AGI for 2018, 2019 and 2020.
Note: While FSA had not treated the I.R.C. §179 deduction as allowed against AGI for S corporations and LLC’s taxed as partnerships, but did allow it for C corporations and individuals, beginning with 2017 crop year the deduction has been allowed against AGI for all entities. It took threatened litigation to get FSA to change its position on this issue.
The AGI limitation, which does not apply for crop insurance purposes, applies to both the entity and the owners of the entity.
Example. Assume that FarmCo receives $100,000 of farm program payments in 2015. FarmCo’s AGI is $850,000. Thus, FarmCo is entitled to a full payment limitation. But, if one of FarmCo’s owners has AGI that exceeds the $900,000 threshold, a portion of FarmCo’s payment limit will be disallowed in proportion to that shareholder’s percentage ownership. So, if the shareholder with income exceeding the $900,000 threshold owns 25 percent of FarmCo, FarmCo’s $100,000 of farm program payment benefits will be reduced by $25,000.
Attribution Rule. Under a rule of direct attribution, individuals and entities are credited with both the amount of payments received directly and also the amount received indirectly by holding an interest in an entity receiving payment. In general, payments to a legal entity (defined as an individual, a partnership, a limited liability company or a corporation) are attributed to the persons who have a direct or indirect interest in the legal entity. But, payments made to a joint venture or general partnership are determined by multiplying the maximum payment amount by the number of persons and entities holding ownership interests in the joint venture or general partnership. That means that joint ventures and partnerships are not subject to the attribution rules.
Note: The direct attribution rule originated in the 2008 Farm Bill and operates as a payment limitation for a farming operation and for each member of the farming operation. The rule tracks payments to legal entities through (up to) four levels of ownership. This means that if another entity has any ownership interest in the farming operating receiving payments, the payments to the farming operation are reduced by a proportionate percentage of that indirect interest. Whether or not direct attribution exists is measured every June 1.
As applied to marketing cooperatives, the attribution rules apply to the producers as persons, and not to the cooperative association of producers. Also, children under age 18 are treated the same as the parents. It is also assumed that if one parent has filled their payment limit, payments made to a child could be attributed to the parent that has not filled their payment limit. For payments made to a revocable trust, they are attributed to the trust’s grantor. As applied to irrevocable trusts and estates, the Ag Secretary is directed to administer the rules so as to ensure "equitable treatment" of the beneficiaries.
What (or Who) is a “Person”?
Definition of “person.” The definition of a “person” under the payment limitation rules is the key to proper structuring of the farming business for maximum payment limits. The definition of “person” is contained at 7 C.F.R Sec. 1400.3. "Persons" may be individuals, corporations, limited liability companies, and certain other business organizations (such as trusts, estates, charitable organizations, and states and their agencies), but general partnerships, joint ventures, and similar “joint operations” may not be "persons." Thus, individuals, along with entities that limit liability, can be a separate person entitled to a payment limit. But other business structures that don’t limit liability are not a separate person for payment limitation purposes. This means that C corporations, S corporations and Limited Liability Companies (i.e., any type of entity that limits liability) all have one payment limitation.
Note: Almost all farming operations are either sole proprietorships, joint operations, corporations or a family operation involving multiple adult family members.
The Farm Service Agency (FSA) then implements the direct attribution rule down to the shareholders/members to the fourth level for each of the respective entities. Thus, the entity has a limitation, and then each member has a limitation. For these entities, if benefits are sought in the name of an entity and there are four shareholders or members of the entity, for example, there is a single payment limit. However, general partnerships, joint ventures, cooperative marketing associations, and other entities that don’t limit liability are not eligible for "person" status, but the members are.
As a general rule, for farming operations other than those that are small, general partnerships and joint ventures are more advantageous for payment limitation and eligibility purposes than corporations, limited liability companies, and limited partnerships. While a corporation, limited liability company, or limited partnership will be only one "person" irrespective of the number of its shareholders or members, each member of a partnership or joint venture may be a separate "person" (unless there is a “combination” of “persons” under one of the so-called “combination rules”). Therefore, more "persons" are potentially available to a farming operation conducted by an entity that doesn’t limit liability than is a farming operation conducted by an entity that does limit liability.
Note: With no limitation on liability comes joint and several liability. Farmers will generally not be comfortable with that, but it can be addressed by having the general partnership farming operation consist of single-member limited liability companies (in states where the governing LLC statute provides for charging orders) or other types of limited liability structures in lieu of individuals.
“Separate and distinct” requirement. Each “separate person" must have a "separate and distinct" economic investment in the farming operation. The “separate and distinct” requirement is measured by a three-part test.
(1) Each separate person must have a separate and distinct interest in the land or the crop involved;
(2) Each separate person must exercise separate responsibility for the separate interest; and
(3) Each separate person must maintain funds or accounts separate from that of any other individual or entity for that interest.
Note: General partnerships and joint ventures may satisfy these requirements on behalf of their members.
Farmers and farm families sometimes jointly purchase inputs or exchange equipment or services. While this is permissible under the rules, farming operations that are separate have to stay that way – separate and distinct. Thus, it is important to make sure that transactions are done at arm’s-length and a paper trail is created that clearly shows that separate farming operations are, indeed, separate and that each one meets all of the applicable requirements. Care should be taken to avoid a USDA argument that there is a commingling of funds between farming operations. Promptly paying for joint purchases is a good idea, as is making sure any equipment exchanges are equivalent. The idea is to avoid the appearance that one farming operation is responsible for what another farming operation is doing.
In addition, to be a “separate person,” that “person” must “[m]aintain funds or accounts separate from that of any other individual or entity for such interest [in the land or crop involved].” This requirement is a prohibition against commingling of funds. It is not a bar on “financing.” The rules on financing are complex. In general, financing restrictions are in the payment limitation and payment eligibility rules as part of the definitions of “capital,” “equipment,” and “land” and apply to “actively engaged in farming” determinations, not “person” determinations.
Illustrative Case
In a case involving a Montana farming operation, Harmon v. United States Department of Agriculture, No. 14-35228, 2016 U.S. App. LEXIS 23105 (9th Cir. Dec. 22, 2016), the plaintiff received federal farm program payments from 2005 through 2008. The USDA determined that the plaintiff was not a separate “person” from his LLC which also received farm program payments for the same years. As a result, the USDA required the plaintiff to refund to the government the payments that he had received. The plaintiff disagreed with the USDA finding and exhausted his administrative remedies with the USDA to no avail. In court, the trial court upheld the USDA’s determination on summary judgment.
On appeal, the appellate court affirmed. The court noted that the plaintiff was required to show that he was “actively engaged in farming” and that he was a “separate person” from the LLC. The court determined that the definition of “person” applied to all of part 1400 of the Code of Federal Regulations (C.F.R.). That’s the part of the C.F.R. containing the “separate person” rules. As a result, the USDA’s interpretation of its own regulation defining “person” for payment limitation purposes that is set forth in 7 C.F.R. Sec. 1400.3 was consistent with the regulation and not plainly erroneous. The court also determined that substantial evidence supported the conclusion that the plaintiff was not a separate person from his LLC due to many unexplained transfers or loans between the plaintiff and the LLC without accompanying documentation. That suggested a commingling of funds, as did the making of operating loans back and forth between the plaintiff and the LLC. As such, the appellate court believed it was not possible to determine the true assets and liabilities of either the plaintiff or the LLC.
The appellate court also believed that the plaintiff had not made a good faith effort to comply with the per-person payment limitations, was not a separate person from the LLC and was entitled to only one payment limit instead of two. Also, the finality rule which makes a determination by a state or county FSA final and binding 90 days from the date an application for benefits was filed did not bar the FSA from evaluating the plaintiff’s program eligibility because the determination was based on misrepresentations that the plaintiff should have known were erroneous. On the application, the plaintiff had represented that he provided all of the capital and labor on his farm and didn’t receive any operating loans from related entities. In addition, while the decision of the Director of the USDA National Appeals Division did not meet the 30-day deadline, it was not void because the statute at issue (7 U.S.C. Sec. 6998(b)(2)) contains no remedy for failure to comply.
Observation: A key problem with the Montana farming operation was its structure. The LLC was a “person” under the rules, so the individual had to meet the tests for being a “separate person” from the LLC. He couldn’t do that with the result that only a single payment limitation applied. A better approach would have been to set the farming operation up as a general partnership. The general partnership would not have qualified as a “separate person,” but the individual farmer could have as a single-member LLC. That still would have resulted in one payment limitation, but additional family members could have been added as members with each having their own single-member LLC. That structure might also help address problems with commingling of funds with the operating entity.
In any event a professional that understands the rules can help to create a structure that can result in compliance with the rules and keep the farming operation from becoming tangled in needless litigation. That’s particularly the case for medium and larger-sized farming operations where the payment limit is in play.
Conclusion
In Part Three later this week, I will take a look at the management and recordkeeping requirements and planning issues for structuring the farm business.
August 9, 2022 in Regulatory Law | Permalink | Comments (0)
