Friday, October 11, 2019

Regulatory Takings – Pursuing a Remedy

Overview

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state governments.  However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” 

Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner.  However, for non-physical (regulatory) takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  In a previous post I addressed U.S. Supreme Court guidance on how to determine the property that the landowner claims has been taken. 

If the taking is by a state or local government, must the landowner “exhaust” state court remedies before seeking compensation for a regulatory taking?  If so, it could result in a landowner having no real access to the federal court system on a constitutional taking claim.  It’s an issue that the U.S. Supreme Court addressed late in its last term this past June.  It’s also the topic of today’s post – pursuing a “takings” remedy in federal court for a state/local-level regulatory taking

Regulatory (Non-Physical) Takings

A non-physical taking may involve the governmental condemnation of air space rights, water rights, subjacent or lateral support rights, or the regulation of property use through environmental restrictions.  How is the existence of a regulatory taking determined?  There are several approaches that the Supreme Court has utilized.

Multi-factor balancing test.  In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation.  In Penn Central Transportation Co. et al. v. New York City, 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development.  Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights.  In 2005, the Court confirmed the multi-factor test and noted that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property.  Lingle, et al. v. Chevron U.S.A., Inc., 544 U.S. 528 (2005).  

Total regulatory taking.  In Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), the landowner purchased two residential lots with an intent to build single-family homes.  Two years later, the state legislature passed a law prohibiting the erection of any permanent habitable structures on the Lucas property.  The law's purpose was to prevent beachfront erosion and to protect the property as a storm barrier, a plant and wildlife habitat, a tourist attraction, and a “natural health environment” which aided the physical and mental well-being of South Carolina's citizens.  The law effectively rendered the Lucas property valueless.  Lucas sued the Coastal Council claiming that, although the act may be a valid exercise of the state's police power, it deprived him of the use of his property and thus, resulted in a taking without just compensation.  The Coastal Council argued that the state had the authority to prevent harmful uses of land without having to compensate the owner for the restriction.

The Supreme Court ruled for Lucas and opined that the state's interest in the regulation was irrelevant since the trial court determined that Lucas was deprived of any economically viable alternative use of his land.  The Lucas case has two important implications for environmental regulation of agricultural activities.  First, the Lucas court focused solely on the economic viability of the land and made no recognition of potential noneconomic objectives of land ownership.  However, in the agricultural sector land ownership is typically associated with many noneconomic objectives and serves important sociological and psychological functions.  Under the Lucas approach, these noneconomic objectives are not recognized.  Second, under the Lucas rationale, environmental regulations do not invoke automatic compensation unless the regulations deprive the property owner of all beneficial use.

Under the Lucas approach, an important legal issue is whether compensation is required when the landowner has economic use remaining on other portions of the property that are not subject to regulation.

Unconstitutional conditions.  In Nollan v. California Coastal Commission,483 U.S. 825 (1987), the plaintiff owned a small, dilapidated beach house and wanted to tear it down and replace it with a larger home.  However, the defendant was concerned about preserving the public's viewing access over the plaintiff's land from the public highway to the waterfront.  Rather than preventing the construction outright, the defendant conditioned the plaintiff's right to build on the land upon the plaintiff giving the defendant a permanent, lateral beachfront easement over the plaintiff's land for the benefit of the public.  Thus, the issue was whether the state could force the plaintiffs to choose between their construction permit and their lateral easement.  The Court held that this particular bargain was impermissible because the condition imposed (surrender of the easement) lacked a “nexus” with, or was unrelated to the legitimate interest used by the state to justify its actions - preserving the view.  The Court later ruled similarly in Dolan v. Tigard, 512 U.S. 374 (1994).  These cases hold that the government may not require a person to give up the constitutional right to receive just compensation when property is taken for a public use in exchange for a discretionary benefit that has little or no relationship to the property. The rule of the cases does not apply to situations involving impact fees and other permit conditions that do not involve physical invasions, but it would apply to monetary exactions where none of the plaintiff’s property is actually taken.  See, e.g., Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013).

State/Local Takings – Seeking a Remedy

For a landowner that has sustained a state/local regulatory (or physical) taking, can compensation be sought initially in federal court or must legal procedures be first pursued in state court with federal courts only available if compensation is denied at the state level?  The U.S. Supreme Court answered this question in 1985.  In Williamson Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), the Court held that if a state provides an adequate procedure for seeking just compensation, there is no Fifth Amendment violation until the landowner has used the state procedure and has been denied just compensation.  However, 28 U.S.C. §1738, would then be applied with the resulting effect that the failure to receive compensation at the state level generally meant that there was no recourse in the federal courts because of the preclusive effect of the landowner having already litigated the same issue(s) in the state courts.  See, e.g., San Remo Hotel L.P., v. City and County of San Francisco, 545 U.S. 323 (2005).  This “catch-22” was what the Court examined earlier this year.

The 2019 Case

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the plaintiff owned a 90-acre farm in Pennsylvania on which she grazed horse and other animals.  The farm includes a small graveyard where ancestors of the plaintiff’s neighbors were buried.  Such “backyard burials” are permissible in Pennsylvania.  In late 2012, the defendant passed an ordinance requiring that “[a]ll cemeteries…be kept open and accessible to the general public during daylight hours.”  The ordinance defined a “cemetery” as “[a] place or area of ground, whether contained on private or public property which has been set apart for or otherwise utilized as a burial place for deceased human beings.”  In 2013, the defendant notified the plaintiff of her violation of the ordinance.  The plaintiff sued in state court for declaratory and injunctive relief on the basis that the ordinance amounted to a taking of her property, but she did not seek compensation via an inverse condemnation action.

While the case was pending, the defendant agreed to not enforce the ordinance.  As a result, the trial court refused to rule on the plaintiff’s action.  Without any ongoing enforcement of the ordinance, the plaintiff couldn’t show irreparable harm.  Without irreparable harm, the court noted, the plaintiff couldn’t establish what was necessary for the equitable relief she was seeking.  Frustrated at the result in state court, the plaintiff filed a takings claim in federal court.  However, the federal trial court dismissed the case because she hadn’t sought compensation at the state level.  Knick v. Scott Township, No. 3:14-CV-2223st (M.D. Pa. Oct. 29, 2015).  The appellate court affirmed, citing the Williamson case.  Knick v. Township of Scott, 862 F.3d 310 (3d Cir. 2017). 

In a 5-4 decision, Chief Justice Roberts (joined by Justices Alito, Gorsuch, Kavanaugh and Thomas), writing for the majority, reversed.  He pointed out that there is a distinction between the substance of a right and the remedy for the violation of that right.  It’s the takings clause of the Fifth Amendment that establishes that the government can only take (either physically or via regulation) private property by paying for it. The government’s infringement on private property is what triggers possible compensation.  The Constitutional violation has occurred and a state court decision that makes the landowner financially whole simply remedies that violation.  It doesn’t redefine the property right.  Thus, the majority opinion reasoned, laws confer legal rights and when those rights are violated there must be legal recourse.  See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).  As the majority noted, “a government violates the Takings Clause when it takes property without compensation, and…a property owner may bring a Fifth Amendment claim [in federal court]… at that time.”

Conclusion

The Court’s decision is a significant win for farmer’s, ranchers, and other rural landowners that are impacted by state and local regulations impacting land use.  A Fifth Amendment right to compensation accrues at the time the taking occurs.  It’s also useful to note that the decision would not have come out as favorably without the presence of Justices Gorsuch and Kavanaugh on the Court.  That’s a point that agricultural interests also note.   

 

October 11, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Wednesday, September 11, 2019

Ag Law and Tax In The Courts

Overview

This month’s installment of court developments concerning agriculture in the courts covers recent developments involving the valuation of a timber enterprise; obtaining a tax refund for an estate due to a financial disability; the calculation of a casualty loss; and the growing of hemp.

Ag law and tax developments in the courts – it’s the topic of today’s post.

Estate Tax Valuation

At issue in Estate of Jones v. Comr., T.C. Memo. 2019-101 were the proper valuations, as of May 28, 2009, of limited partner units in a timber business and stock shares in a sawmill. The decedent died in 2014, having established the sawmill business in 1954 and expanding it substantially since then. The decedent bought about 25,000 acres of timber in 1989 and an additional 125,00 acres in 1992. Later in 1992, the decedent formed the limited partnership to invest in, acquire, hold and manage timberlands and real estate and incur debt. The decedent transferred the timberland, which was considered to be the sawmill’s inventory, to the limited partnership in exchange for an interest in the entity.

The decedent began doing some succession planning in 1996 with the intent of keeping the business in the family as a successful operation. That plan included making gifts of interests in the businesses to family members, including significant blocks of stock. Upon the decedent’s death, the IRS challenged the valuation for gift tax purposes of the 2009 transfers of limited partnership interests and interests of the S corporation that owned the sawmill. Transfer of the limited partnership units was also restricted via a buy-sell agreement that contained a right-of-first refusal. Thus, the determination of fair market value of the 2009 transfers had to account for lack of marketability, lack of control, lack of voting rights of an assignee and reasonably anticipated cash distributions allocable to the gifted interests.

The IRS valued the transfers utilizing a net asset value approach and the estate’s expert used a discounted cash flow approach for both the timberland and the mill. The Tax Court agreed with the valuation arrived at by the estate’s expert, a far lower amount than what the IRS had arrived at. 

There are many underlying details concerning the valuation approaches that I am not discussing here.  The major point is, however, that taking care to follow well-established valuation procedures and keeping good records is essential.  The Tax Court will often adopt the approach that is most precise and is substantiated.

Refund Claims Due To Financial Disability

I.R.C. §6511(h) establishes a statute of limitations for filing a claim for refund due to financial disability. The provision provides “an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” I.R.C. §6511(a)-(c) specifies that, “In the case of an individual, the running of the periods specified in subsections (a), (b), and (c) shall be suspended during any period of such individual’s life that such individual is financially disabled.”  In Carter v. United States, No. 5:18-cv-01380-HNJ, 2019 U.S. Dist. LEXIS 134035 (N.D. Ala. Aug. 9, 2019) a decedent’s estate sought relief on the basis that the estate’s personal representative was financially disabled for a period of time entitling the estate to file a claim for refund after the time period set forth in I.R.C. §6511(a). The estate claimed that it should be treated as in individual for relief purposes. The estate sought a refund of federal estate tax tied to the value of bank stock that the decedent held at the time of death which made up 45 percent of the gross estate value. Unknown at the time of death was that a fraud had been committed against the bank which ultimately led to the bank being shut down and the stock rendered worthless. The personal representative was traumatized by the events, suffering emotional distress which rendered her unable to manage the estate which was substantiated by a physician who maintained that the representative’s disabilities triggered § 6511(h)’s equitable tolling provision so as to excuse the untimely filing of the refund claim.

The court disagreed with the estate’s position, holding that the term “individual” in I.R.C. §6511(h)(1) did not apply to an estate. The court pointed out that I.R.C. §7701(a)(1) defines a person as “an individual, a trust, estate, partnership, association, company or corporation.” The court reasoned that this made it clear that the Congress saw individuals and estates as distinct types of taxpayers, and the use of the term individual in IRC §6511(h) limited the relief to natural persons. The court also noted that even if the estate’s claim weren’t time-barred, it would fail on its own merits because estate tax value is based on the value as of the date of death or the alternate valuation date of six months after death. Simply because the fact of the bank fraud arose post-death didn’t change the fact that it wasn’t known at the time of death and the stock was being actively traded at death, the measuring date for federal estate tax purposes. 

Calculating a Casualty Loss

While the casualty loss deduction rules have been modified for tax years beginning after 2017, the underlying manner in which a casualty loss is to be computed remains largely the same.  Those rules involve documenting the value of the property before the casualty; determining the value after the casualty; income tax basis; and the amount of insurance proceeds received.  It’s a big issue for agriculture particularly because of the exposure of agricultural property to weather.  A recent Tax Court case illustrates how a casualty loss is computed.

In Taylor II v. Comr., T.C. Memo. 2019-102, the petitioner claimed a casualty loss on his 2008 return for damage from a hurricane. An insurance company paid over $2.3 million in claims, and the claimed deduction was $888,345. The petitioner reported a basis in the property of $6.5 million, insurance reimbursement of $2.3 million and a pre-casualty fair market value of $15,442,059 and a post-casualty fair market value of $12,250,000. The pre-casualty FMV was based on the 2009 listing price of the property reduced for time spent on the market. No testimony was provided as to post-casualty FMV.

The Tax Court (Judge Paris) noted that to compute a casualty loss deduction, the pre and post-FMV values of the impacted property must be computed and the property basis must be established. The Tax Court noted that decline in value can alternatively be established via the regulations under I.R.C. §165 if the taxpayer has repaired the property damage resulting from the casualty, the taxpayer may use the cost of repairs to prove the loss of value to the property from the casualty. In that instance, the taxpayer must show that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty. The Tax Court noted that the record did not establish that the valuations were based on competent appraisals, and didn’t indicate how the petitioner’s CPAs determined the pre or post-casualty FMV of the property, even though the pre-casualty FMV was consistent with the value reported to the insurance company. The Tax Court concluded that the appraisals were not reliable measures of the taxpayer's casualty loss and didn’t rely on them. In addition, the taxpayer received insurance payments that exceed the cost of repairs. That meant that a casualty loss deduction couldn’t be claimed based on the regulations. The Tax Court disallowed any casualty loss deduction. 

Growing of Hemp

The 2018 Farm Bill allows for hemp (not marijuana) production and allows states and Indian tribes to opt for either primary regulatory authority, or USDA authority over any proposed hemp production. Under the primary authority option, a state may submit its own plan to the U.S. Secretary of Agriculture (Secretary). Once a plan is submitted, the Secretary has 60 days to approve or deny the plan. Under the “USDA option,” hemp can be produced under a plan established by the USDA, but the plan must still be submitted to and approved by the Secretary. The Farm Bill provides that the Secretary has explicit authority to set regulations and guidelines that relate to the implementation to both the primary regulatory authority option or the USDA option. On February 27, 2019, the USDA issued a notice that the agency had begun gathering information to promulgate rules and regulations related to the 2018 Farm Bill and the production of hemp in the United States.

In Flandreau Santee Sioux Tribe v. United States Department of Agriculture, No. 4:19-CV-04094-KES, 2019 U.S. Dist. LEXIS 95188 (D. S.D. Jun. 6, 2019), the plaintiff, an Indian tribe, submitted its own proposed hemp production plan in March of 2019.  The Secretary issued a letter in stating that the plan would be approved or denied within 60 days after hemp production regulations were finalized – likely in the fall of 2019. On May 6, the plaintiffs submitted a letter to USDA requesting a waiver of regulatory requirements so that the plaintiff could plant hemp during the 2019 growing season. A meeting was held to discuss the waiver. Later that month the plaintiff sued for a temporary restraining order or preliminary injunction seeking to force the USDA to grant the hemp planting waiver.

A hearing on the temporary restraining order was held in June. After the hearing, the court denied the plaintiff’s motion. The court determined that the plaintiff’s motion was not yet ripe and that the plaintiff was not likely to ultimately succeed on the merits of its claim. The court noted that the Farm Bill gave the Secretary broad discretion with respect to hemp production. In addition, the 60-day window to approve or reject plans did not begin until the USDA finalized regulations. The court also noted that there was no monetary remedy built into the law because the USDA was not required to pay compensation for economic losses. The court also determined that the plaintiff’s potential economic losses did not outweigh the impact on the USDA if the injunction were to be granted. The court noted that the issuance of an injunction would force the USDA to act before it could carefully lay out the regulations on hemp production. Such haste in allowing production could have detrimental long-term effects. 

Conclusion

There’s never a dull moment in ag law and tax. 

September 11, 2019 in Business Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, August 16, 2019

Court Decision Illustrates USDA’s Swampbuster “Incompetence”

Overview

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “swampbuster.” Swampbuster was introduced into the Congress in January of 1985 at the urging of the National Wildlife Federation and the National Audubon Society. It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made. Thus, there was virtually no opposition to Swampbuster.

But, the “dirt is in the details” as it is often said.  Just how does the USDA determine if a tract of farmland contain a wet area that is subject to regulation?  That’s a question of key importance to farmers.  That process was also the core of a recent court opinion, in which the court painted a rather bleak and embarrassing picture of the USDA bureaucrats. 

Swampbuster and the USDA’s process for determining land subject to the Swampbuster rules – that’s the topic of today’s post.

Swampbuster Rules

The legislation charged the soil conservation service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.  The presence of hydrophytic vegetation, by itself, is insufficient to meet the wetland hydrology requirement and the statute clearly requires the presence of all three characteristics. B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).  

Under the June 1986 interim rules, wetland was assumed to be truly wet ground that had never been farmed. In addition, “obligation of funds” (such as assessments paid to drainage districts) qualified as commenced conversions, and the Fish and Wildlife Service (FWS) had no involvement in ASCS or SCS decisions. In September of 1986, a proposal to exempt from Swampbuster all lands within drainage districts was approved by the chiefs of the ASCS, SCS, FmHA, FCIC and the Secretary of Agriculture. However, the USDA proposal failed in the face of strong opposition from the FWS and the EPA.

The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules. The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion. Added were farmed wetlands, abandoned cropland, active pursuit requirements, FWS concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill). If the drainage work was not completed by December 23, 1985, a request could be made of the ASCS on or before September 19, 1988, to make a commencement determination. Drainage districts must satisfy several requirements under the “commenced conversion” rules. A project drainage plan setting forth planned drainage must be officially adopted. In addition, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.

The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b).  Prior converted wetlands can be farmed, but they revert to protected status once abandoned. Abandonment occurs after five years of inactivity and can happen in one year if there is intent to abandon.  A prior converted wetland is a wetland that was totally drained before December 23, 1985. Under 16 U.S.C. §3801(a)(6), a “converted wetland” is defined as a wetland that is manipulated for the purpose or with the effect of making the production of an agricultural commodity possible if such production would not have been possible but for such action.   See, e.g., Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008).  If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original drainage can be maintained.

Identifying a Wetland – The Boucher Saga

The process that the USDA uses to determine the presence of wet areas on a farm that are subject to the Swampbuster rules (known as the “on-site” wetland identification criteria) are contained in 7 C.F.R. §12.31.   The application of the rules was at issue in the most recent opinion in a case involving an Indiana farm family’s longstanding battle with the USDA. 

Facts and administrative appeals.  The facts of the litigation reveal that the plaintiff (and her now-deceased husband) owned the farm at issue since the early 1980s. The farmland has been continuously used for livestock and grain production for over 150 years. The tenants that farm the land participated in federal farm programs. In 1987, the plaintiffs were notified that the farm might contain wetlands due to the presence of hydric soils.  This was despite a national wetland inventory that was taken in 1989 that failed to identify any wetland on the farm.  In 1991, the USDA made a non-certified determination of potential wetlands, prior converted wetlands and converted wetlands on the property. In 1994, the plaintiff’s husband noticed that passersby were dumping garbage on a portion of the property. To deter the garbage-dumping, the plaintiff’s husband cleaned up the garbage, cleared brush, and removed five trees initially and four more trees several years later.  The trees were upland-type trees that were unlikely to be found in wetlands, and the tree removal impacted a tiny fraction of an acre.  The USDA informed the landowners that the tree removal might have triggered a wetland/Swampbuster violation and that the land had been impermissibly drained via field tile (which it had not). 

Because the land at issue was farmed, the USDA’s Natural Resources Conservation Service (NRCS) used an offsite comparison field to compare with the tract at issue for a determination of the presence of wetland.  The comparison site chosen was an unfarmed depression that was unquestionably a wetland.  In 2002, an attempt was made to place the farm in the Conservation Reserve Program, which triggered a field visit by the NRCS. However, a potential wetland violation had been reported and NRCS was tasked with making a determination of whether a wet area had been converted to wetland after November 28, 1990. The landowners requested a certified wetland determination, and in late 2002 the NRCS made a “routine wetland determination” that found all three criteria for a wetland (hydric soil, hydrophytic vegetation and hydrology) were present by virtue of comparison to adjacent property because the tract in issue was being farmed. The landowners were notified in early 2003 of a preliminary technical determination that 2.8 acres were converted wetlands and 1.6 acres were wetlands.  The NRCS demanded that the landowners plant 300 trees per acre on the 2.8 acres of “converted wetland.”

The landowners requested a reconsideration and a site visit. Two separate site visits were scheduled and later cancelled due to bad weather. The landowners also timely notified NRCS that they were appealing the preliminary wetland determination and requested a field visit, asserting that NRCS had made a technical error. A field visit occurred in the spring of 2003 and a written appeal was filed of the preliminary wetland determination and a review by the state conservationist was requested. The appeal claimed that the field visit was inadequate.  The husband met with the State Conservationist in the fall of 2003.  No site visit occurred, and a certified final wetland determination was never made.  The landowners believed that the matter was resolved.

The husband died, and nine years later a new tenant submitted a “highly erodible land conservation and wetland conservation certification” to the FSA. Permission was requested from the USDA to remove an old barn and house from a field to allow farming of that ground. In late 2012, the NRCS discovered that a final wetland determination had never been made and a field visit was scheduled for January of 2013 shortly after several inches of rain melted a foot of snow on the property.  At the field visit, the NRCS noted that there were puddles in several fields.  The NRCS used the same comparison field that had been used in 2002, and also determined that underground drainage tile must have been present (it was not).   

Based on the January 2013 field visit, the NRCS made a final technical determination that one field did not contain wetlands, another field had 1.3 acres of wetlands, another field had 0.7 acres of converted wetlands and yet another field had 1.9 acres of converted wetlands. The plaintiff (the surviving spouse) appealed the final technical determination to the USDA’s National Appeals Division (NAD).   At the NAD, the plaintiff asserted that either tile had been installed before the effective date of the Swampbuster rules in late 1985 or that tiling wasn’t present (a tiling company later established that no tiling had been installed on any of the tracts); that none of the tracts showed water inundation or saturation; that none of the tracts were in a depression; and that the trees that were removed over two decades earlier were not hydrophytic, were not dispositive indicators of wetland, and that improper comparison sites were used.  The NRCS claimed that the tree removal altered the hydrology of the site.  The USDA-NAD affirmed the certified final technical determination.  The plaintiff appealed, but the NAD Director affirmed.  The plaintiff then sought judicial review.    

Trial court decision.  The trial court affirmed the NAD Director’s decision and granted summary judgment to the government.   Boucher v. United States Department of Agriculture, No. 1:13-cv-01585-TWP-DKL, 2016 U.S. Dist. LEXIS 23643 (S.D. Ind. Feb. 26, 2016). The court based its decision on the following:

  • The removal of trees and vegetation had the “effect of making possible the production of an agricultural commodity” where the trees once stood and, thus, the NRCS determination was not arbitrary or capricious with respect to the converted wetland determination.
  • The NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed.
  • Existing regulations did not require site visits during the growing season.
  • “Normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation.
  • The ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights.

Appellate Decision

The appellate court reversed the trial court decision and remanded the case for entry of judgment in the plaintiff’s favor and award her “all appropriate relief.”  Boucher v. United States Dep’t of Agric., No. 16-1654, 2019 U.S. App. LEXIS 23695 (7th Cir. Aug. 8, 2019).  On the comparison site issue (the USDA’s utilization of the on-site wetland identification criteria rules), the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site has the same hydrologic features as the subject tract(s).  The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case.   However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary.  Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland."

The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in.   Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor.  In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process.   The appellate court rather poignantly stated, “Rather than grappling with this evidence, the hearing officer used transparently circular logic, asserting that the Agency experts had appropriately found hydric soils, hydrophytic vegetation, and wetland hydrology…”.

Conclusion

The USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  Those same agency characteristics were also illustrated in the Eighth Circuit decision of Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).  Perhaps much of the USDA/NRCS conduct relates to the bureaucratic unilateral decision in 1987 to change the rules to include farmed wetland under the jurisdiction of Swampbuster.   That decision has led to abuse of the NAD process and delays that have cost farmers untold millions.  Hopefully, the clean-out of some USDA bureaucrats as a result of the new Administration that began in early 2017 will result in fewer cases like this in the future.  

August 16, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (1)

Tuesday, August 6, 2019

Kansas Revenue Department Takes Aggressive Position Against Remote Sellers

Overview

In 2018, the U.S. Supreme Court, in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), handed South Dakota a narrow 5-4 win in its quest to collect taxes from online sales.  The Court held that the Constitution’s Commerce Clause did not bar South Dakota from statutorily requiring remote sellers without a physical presence in the state to collect and remit sales tax on goods and services that are sold to buyers for delivery inside the state of South Dakota.  In so doing, the Court distinguished and at least partially overruled 50 years of Court precedent on the issue. 

But, did the Court open the floodgates for the states to tax every dollar of sales in a state from an out-of-state seller?  That’s a hard case to make because the Court ruled specifically on a South Dakota statute that contained a de minimis sales requirement before state sales tax kicked-in.  However, the Kansas Department of Revenue (KDOR) has now taken the position that any amount of sales by a remote seller (a seller without any physical presence in Kansas) to a Kansas buyer triggers the need of the remote seller to register with the state and pay Kansas sales tax. 

The Kansas position concerning sales taxation of remote sellers and implications – the focus of today’s blog post.

Online Sales - Historical Precedent

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

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

More recently, in 2015, the Court examined a Colorado “tattletale” law that required out-of-state sellers with no physical presence in the state “to notify…customers of their use tax liability and to report” sales information back to Colorado.  Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2013).  The trial court enjoined enforcement of the law on Commerce Clause grounds.  On appeal, the Tenth Circuit held that it couldn’t hear the challenge to the law because the Tax Injunction Act (28 U.S.C. §1341) divested it of jurisdiction and the matter belonged in state court and, ultimately, the U.S. Supreme Court.  The Tenth Circuit remanded the case for dismissal of the Commerce Clause claims and dissolution of the permanent injunction.  The U.S. Supreme Court reversed and remanded the decision of the Tenth Circuit on the jurisdiction issue and, on remand, the Tenth Circuit, invalidated the Colorado law on Commerce Clause grounds.  Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). 

In the U.S. Supreme Court’s reversal and remand of the Tenth Circuit’s decision in Direct Marketing Association, Justice Kennedy wrote a concurring opinion that essentially invited the legal system to find an appropriate case that would allow the Court to reexamine the Quill and National Bellas Hess holdings.  Hence, the South Dakota legislation. 

South Dakota Legislation and Litigation

S.B. 106 was introduced in the 2016 legislative session of the South Dakota legislature.  It requires the collection of sales taxes from certain remote sellers – those with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same timeframe. 

S.B. 106 was signed into law on March 22, 2016, and the state Department of Revenue soon thereafter began issuing notices to sellers that it thought were in violation of the law.  Several out-of-state sellers that received notices did not register for sale tax licenses as the law required.  Consequently, the state brought a declaratory judgment action against the sellers in circuit court, and sought a judicial declaration that the S.B. 106 requirements were valid and applied to the sellers.  The state also sought an order enjoining enforcement of S.B. 106 while the action was pending in court, and an injunction that required the sellers to register for licenses to collect and remit sales tax. 

The sellers tried to remove the case to federal court based on federal question jurisdiction, but the federal court rejected that approach and remanded the case to the South Dakota Supreme Court.  South Dakota v. Wayfair, Inc., 229 F. Supp. 3d 1026 (D. S.D. 2017).  On remand, the South Dakota Supreme Court invalidated S.B. 106 on Commerce Clause grounds based on the U.S. Supreme Court precedent referenced above.  State v. Wayfair, Inc., et al., 901 N.W.2d 754 (S.D. 2017)The state of South Dakota filed a petition for certiorari with the U.S. Supreme Court and the Court granted the petition.

U.S. Supreme Court Decision – The Importance of “Substantial Nexus”

Article I, Section 8 of the U.S. Constitution says that, “The Congress shall have the power...to regulate commerce…among the several states…”.  That was the key point of the Court’s 1967 Bellas Hess, Inc. decision.  As noted above, in that case the Court stated that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States.”  In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court ruled that a state tax would be upheld if it applied to an activity having a substantial nexus with the state; was fairly apportioned; did not discriminate against interstate commerce; and, was fairly related to the services that the state provided.  Later, in the Quill case, the Court determined that a physical presence in the taxing jurisdiction was what satisfied the Brady “substantial nexus” requirement. 

In Wayfair, the Court determined that a “substantial nexus” could be present without the party subjected to tax having a physical presence in the taxing jurisdiction.  But, the key point is that the “substantial nexus” test of Brady remains.  Likewise, the other three requirements of Brady remain.  A state can only impose sales (or use) tax on a remote seller without a physical presence in the state if the tax is fairly apportioned; does not discriminate against interstate commerce; and is fairly related to services that the state provides.  In other words, taxing a business without a physical presence in the state cannot unduly burden interstate commerce.  The Wayfair majority determined that the South Dakota law satisfied these tests because of the way it was structured – it had only a  limited application due to the requirement of a de minimis a dollar amount of sales or transactions in the state; it was not applied retroactively; South Dakota was a member of the Streamlined Sales and Use Tax Agreement (SSUTA); the sellers at issue were national businesses with a large online presence; and South Dakota provided tax software to ease the administrative burden. 

KDOR Notice

On August 1, 2019, the KDOR issued Notice 19-04 designed to provide “guidance” to remote sellers doing business in Kansas.  https://www.ksrevenue.org/taxnotices/notice19-04.pdf  In the Notice, the KDOR noted that Kansas law (Kan. Stat. Ann. §79-3702(h)(1)(F)) defines a “retailer doing business in this [Kansas]” as:  “any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and the law of the United States.”  The KDOR also noted that the Kansas requires online (and other remote) sellers with no physical presence in Kansas to collect and remit “the applicable” sales and use tax on sales delivered into Kansas.  KDOR indicated that remote sellers are to register and begin collecting and remitting Kansas sales and/or use tax by October 1, 2019. 

The Notice, as strictly construed, is correct.  The state can require a remote seller to register with the state and collect and remit sales and/or use tax “under the provisions of the constitution and the laws of the United States.”  That would mean as the applicable law has been defined by the U.S. Supreme Court, including the Court’s most recent Wayfair decision – which involved a state law that contained a de minimis requirement based on amount of sales or number of transactions.  However, the KDOR Notice did not specify any level of de minimis sales before sales tax was triggered.  Indeed, the Director of Research and Analysis for KDOR was quoted in the Bloomberg Daily Tax Report (online) on August 1 as stating that KDOR “does not believe it needs a de minimis threshold” based on Kan. Stat. Ann. §79-3702.  This is an inaccurate statement that will likely invite a legal challenge to the KDOR’s position.  There simply is no protection in the Wayfair decision for KDOR’s position.  The “substantial nexus” test still must be satisfied – even with a remote seller.  Indeed, during the 2019 session of the Kansas legislature, a major tax bill contained de minimis requirements that mirrored the South Dakota legislation, but the Governor vetoed the bill and the Kansas House failed to override the veto.  Presently, no other state has taken the position that the KDOR has taken. 

Conclusion

The KDOR’s position amounts to a frontal assault on the Commerce Clause post-Wayfair.  Presently, 23 states are “full members” of the SSUTA.  For those states, Wayfair at least implies that membership in the SSUTA has the effect of minimizing the impact on interstate commerce.  But, that doesn’t mean that SSUTA membership eliminates the “substantial nexus” requirement.  Indeed, South Dakota was an SSUTA member and the Court still went through the “substantial nexus” analysis.  Thus, it appears that any state legislation must have exceptions for small businesses with low volume transactions and sales revenue.  Whether a series LLC (in some states such as Iowa) or subsidiaries of a business could be created, each with sales below the applicable threshold, remains to be seen.

On a related note, could the KDOR (or any other state revenue department) go after a portion of business income of the out-of-state business via income tax?  That seems plausible.  However, the Interstate Income Act of 1959 (15 U.S.C. §381-384), requires that a business (or individual – the business form does not matter because corporations have long held personhood status under the Constitution (see, Bank of the United States v. Deveaux, 9 U.S. 61 (1809); Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014)) have some sort of connection with a state before its income can be taxed (at least with respect to the solicitation of orders for tangible personal property).  Is that legislation now unconstitutional too? Or, is there a distinction remaining between taxing receipts as opposed to income?  That may be at issue in a future Supreme Court case. 

For now, it’s practically a sure bet that, unless the Kansas legislature passes a bill containing de minimis thresholds that can withstand the Governor’s veto, the state will be devoting taxpayer resources to defending a lawsuit that will challenge the state’s (as of now) unsupportable position.  

August 6, 2019 in Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, August 2, 2019

Ag Legal Issues in the Courts

Overview

It’s been about a month since I devoted a blog post to court litigation involving agricultural producers and businesses.  So, it’s time to devote another post to the matter as an illustration of how often the law and the business of agriculture intersect.  These posts have proven to be quite popular and instructive.

“Ag in the Courtroom” – the most recent edition.  It’s the topic of today’s post.

More Bankruptcy Developments

As I have noted in numerous posts over the past couple of years, the difficult economic conditions in much of agriculture in the Great Plains and the Midwest have made bankruptcy law rise in importance.  Fortunately, legislation is headed to the President’s desk that will increase the debt limit in Chapter 12 bankruptcy to $10 million and place some of the existing Chapter 12 provisions in Chapter 11 for use by non-farm small businesses.  Those were needed pieces of legislation.

A recent Alabama bankruptcy case illustrates the peril of selling loan collateral without the creditors notice and consent.  It’s a unique set of facts because the debtor sold the collateral, a tractor, to bail her boyfriend out of jail.  In In re Reid, 598 B.R. 674 (Bankr. S.D. Ala. 2019), the Farm Service Agency (FSA) attached itself as a creditor in the debtor’s chapter 7 bankruptcy proceeding. In March of 2016 the debtor took out two FSA loans for a total of $50,000. A security agreement was also executed at the same time granting the FSA a security interest in "All farm equipment . . . and inventory, now owned or hereafter acquired by the Debtor, together with all replacements, substitutions, additions, and accessions thereto, including but not limited to the following which are located in the State of Alabama." A specific list of assets was attached, including a New Holland tractor, ten beef breeding cows, and nine calves. The debtor used the loan proceeds to purchase the equipment and livestock that was listed as collateral.

In June of the same year, the debtor was notified that she could not have cattle on the land she purchased with another loan not at issue in the case. However, the debtor was never notified of the restriction and it was not stated in the purchase contracts. Ultimately, the debtor was given thirty days to vacate the premises. Around this time, the debtor’s equipment and cattle started to go missing. The debtor was also becoming aware that her boyfriend (and father of her children) had a drug problem, and she began to suspect that he was selling the equipment and cattle for drugs. Later, the debtor attempted to stop a man from taking cattle from the property and the man said to take it up with her boyfriend. The debtor did not report the cattle or equipment as stolen. The debtor’s boyfriend was arrested about the same time for drug crimes and eluding the police. The debtor vacated the property with the only collateral remaining at the property being the New Holland tractor, which the debtor listed for sale on Facebook. The debtor testified that she sold the New Holland tractor to an unknown purchaser for between $6,000.00 and $8,000.00. But the exact price and identity of the purchaser could not be found as the debtor deleted her Facebook account. The proceeds of the tractor sale were put towards bail money for the boyfriend. The debtor never made a payment on the loans and vacated the property before the first payment was due.

The FSA attempted to recover the tractor but was unsuccessful. The FSA sought to have the bankruptcy court find the debt owed to the FSA in the amount of $52,048.56 plus interest to be non-dischargeable for fraud; fiduciary defalcation; embezzlement; and willful and malicious injury. The court averaged the alleged selling price of the tractor and rendered $7,000 non-dischargeable. The court also determined that the debtor did not fraudulently obtain the FSA loans, and did not embezzle the collateral because fraud wasn’t present. Because willful and malicious injury was present upon the debtor’s sale of the tractor without notice to the FSA and use of the proceeds for the debtor’s personal benefit, the $7,000 that the debtor received upon sale of the tractor was non-dischargeable. 

The Intersection of State and Federal Regulation

Agriculture is a heavily regulated industry.  Sometimes that regulation is apparent and sometimes it occurs an a rather unique manner.  Sometimes it comes from the federal government and sometimes it is purely at the state and local level.  In yet other situations, the regulation is an interesting (and frustrating for those subject to it) blend of federal and state/local regulation. 

In 2009, the defendant in Carroll Airport Comm'n v. Danner, No. 17-1458, 2019 Iowa Sup. LEXIS 57 (May 10, 2019), planned to construct a grain leg (bucket elevator) and grain bins. In 2013, the defendant obtained the proper county zoning permits but was told of the need to comply with the airport zoning ordinances. The grain leg stands within 10,000 feet horizontally from the end of plaintiff’s runway. The structure reaches a height of 127 feet off the ground. The parties agree the grain leg intrudes within the airport's protected airspace by approximately sixty feet. After construction began it was evident that there would be issues with the airport zoning ordinances and the plaintiff asked the Federal Airport Administration (FAA) to perform an aeronautical study of the grain leg and its impact on aviation safety. The FAA issued a letter stating, "This aeronautical study revealed that the structure does exceed obstruction standards but would not be a hazard to air navigation." It also warned, “This determination concerns the effect of this structure on the safe and efficient use of navigable airspace by aircraft and does not relieve the sponsor (i.e., the defendant) of compliance responsibilities relating to any law, ordinance, or regulation of any Federal, State, or local government body.” Lastly the FAA requested that the defendant paint the structure and add red lights to the top of it. The defendant did so. The FAA also adjusted the flight patterns in and out of the airport to accommodate this structure. The plaintiff did not seek review under this determination.

Two years later, the plaintiff (the local airport commission) sued alleging the grain leg violated certain building ordinances; city and county zoning ordinances; airport commission regulations; and constituted a nuisance and hazard to air traffic. The plaintiff sought equitable relief—an injunction requiring the defendant to modify or remove the grain leg. The defendant raised an affirmative defense of federal preemption. In June 2017, the trial court found that the grain leg violated state and local zoning ordinances and constituted a nuisance and an airport hazard. The trial court found that the grain leg did not fall within the agricultural exemption to certain zoning laws and rejected the defendants’ affirmative defense that the no-hazard letter preempted state and local zoning ordinances. The appellate court affirmed, concluding that the doctrines of express, implied, and conflict preemption did not apply to the FAA no-hazard determination. On further review, the state Supreme Court affirmed. The Supreme Court concluded that the FAA no-hazard determination did not preempt local zoning ordinances, was not legally binding, and contained language notifying the defendant that compliance with local rules was required. 

Water Rights

Rights involving surface water vary from state-to-state.  In some parts of the U.S., however, a party owning land adjacent to a watercourse has what are known as “riparian” rights to the water.  But, do those rights apply to man-made lakes, or just natural lakes?  The issue came up recently in Incline Village Board of Trustees v. Edler, No. SC97345, 2019 Mo. LEXIS 178 (Mo. Sup. Ct. Apr. 30, 2019). 

The defendants owned properties in subdivisions around a lake. One of the properties of the second subdivision abutted the lake. The properties they owned in the first subdivision did not abut the lake. During the creation of the first subdivision, restrictions were added to the land. One such restriction stated, “No structures or other improvements shall be made on or to any common area, including any body of water, other than such structures or improvements which are made by the trustees for the benefit of all lot owners. Except that, the owner of each lot which abuts any body of water, may construct one boat dock on such body of water, provided that, said boat dock extends from said lot and is first approved in writing by the trustees.” All landowners in the first subdivision were entitled to use the lake, even if they did not abut the lake. The second subdivision was not joined with the first one, but it was clear that the second subdivision was excluded from use rights on the lake. Lots in the first subdivision were subject to assessments to maintain the lakes.

The defendants built a dock on the property on the second subdivision. The trustees of the first subdivision defendants sued seeking a declaratory judgment, damages for trespass, and the removal of the dock. The district court ordered removal of the dock and determined that special circumstances existed supporting the award of attorney's fees of $70,000 in favor of the trustees.

On appeal, the appellate court determined that the lake was clearly artificial and, thus, the defendants were not riparian owners. Riparian rights are only extended to landowners adjacent to natural lakes. The appellate court also rejected the defendants’ reliance-based argument. The appellate court noted that the defendants had never had use of the lake for dock purposes or paid assessments for its maintenance. In addition, the defendants’ predecessor in title's deed to the adjacent land explicitly excepted the lake from the transfer. In addition, the plaintiffs had told the defendants of the property restrictions before the dock was built. As for attorney fees, the appellate court determined that there was not any special circumstance to merit an award of attorney fees. The plaintiff had not given any formal warning about not building the dock and the defendants had sought legal advice. 

Conclusion

It’s never a dull moment in ag law involving ag producers, agribusinesses and rural landowners.  The cases keep on rolling in. 

August 2, 2019 in Bankruptcy, Regulatory Law, Water Law | Permalink | Comments (0)

Thursday, July 25, 2019

Regulation of Food Products

Overview

Agriculture is a heavily regulated industry.  Land ownership; production activities; marketing of ag products; and food products that are in the consumer (and livestock) food supply are subject to federal and state regulations.  What are the major federal rules?  How do they apply to producers of food products?

The regulation of food products – it’s the topic of today’s post.

Overview

The government agencies with primary responsibility for ensuring the safety of the U.S. food supply are the USDA (through the Food Safety and Inspection Service (FSIS)) and the Food and Drug Administration (FDA).  While neither agency has the authority to mandate a recall of unsafe food, they have developed general oversight procedures and protocol for voluntary food recalls by private companies.  The USDA is generally responsible for the regulation of meat, poultry and certain egg products, while the FDA has responsibility for the regulation of all other food products including seafood, milk, grain products, fruits and vegetables, and certain canned, frozen and otherwise packaged foods that contain meat, poultry and eggs that USDA does not otherwise regulate.

Food Adulteration and Misbranding

The regulations generally proscribe the adulteration and misbranding of food.  In general, a food is considered adulterated if it contains a harmful substance that may pose a safety risk, contains an added harmful substance that is acquired during production or cannot be reasonably avoided, contains a unapproved substance that has been intentionally added to the food, or if it has been handled under unsanitary conditions that presents a risk of contamination that may pose a safety threat.  Under the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. §§ 301-399), the manufacture, delivery, receipt or introduction of adulterated food into interstate commerce is prohibited. However, the USDA regulations did not prevent the introduction into the human food chain of meat from downed livestock.  In Baur v. Veneman, 352 F.3d 625 (2d Cir. 2003), a beef consumer argued that the USDA should label all downed livestock as “adulterated,” and that the consumption of meat from downed animals created a serious health risk of disease transmission and that elimination of downed cattle from the human food stream was necessary to protect the public health.  In late 2003, the United States Court of Appeals for the Second Circuit held that the beef consumer had standing to challenge the USDA policy.  Shortly thereafter, the presence of “Mad-Cow” disease was discovered in the U.S., and the USDA announced on December 30, 2003, that it was changing its regulations to ban the meat from downed animals from the human food chain. FSIS issued a series of three interim rules in early 2004.  The final rule is effective October 1, 2007, and prohibits the slaughter of non-ambulatory cattle in the United States (except that veal calves that cannot stand due to fatigue or cold weather may be set apart and held for treatment and re-inspection). 72 Fed. Reg. 38699 (July 13, 2007). Also, the final rule specifies that spinal cord must be removed from cattle 30 months of age and older at the place of slaughter, and that records must be maintained when beef products containing specific risk materials are moved from one federally inspected establishment to another for further processing.  Under the final rule, countries that have received the internationally recognized BSE status of “negligible risk” are not required to remove specific risk materials.

While neither the USDA nor the FDA can order a private company to recall unsafe food products, they can issue warning letters, create adverse publicity, seize unsafe food products, seek an injunction or begin prosecuting criminal proceedings. 

For food products over which the FSIS has jurisdiction, upon learning that a misbranded or adulterated food item may have entered commerce, the FSIS will conduct a preliminary investigation to determine whether a voluntary recall is warranted.  If a recall is deemed necessary, a determination is made as to the degree of the recall and the public is notified.  For food products subject to the FDA’s jurisdiction, a similar procedure is utilized.

Organic Foods

Organic foods are produced according to certain production standards.  For crops, “organic” generally means they were grown without the use of conventional pesticides, artificial fertilizers, human waste, or sewage sludge, and that they were processed without ionizing radiation or food additives.  For animals, “organic” generally means they were raised without the use of antibiotics and without the use of growth hormones.  In most countries, organic produce must not be genetically modified.

Historically, organic farms have been relatively small family-run farms with organic food products only available in small stores or farmers' markets.  More recently, organic foods have become much more widely available, and organic food sales within the United States have grown by 17 to 20 percent a year in recent years while sales of conventional food have grown at only about 2 to 3 percent annually.  This large growth is predicted to continue, and many companies (including Wal-Mart) are beginning to sell organic food products.

An organic food producer must obtain certification in order to market food as organic.  Under the Organic Food Production Act (OFPA) of 1990 (7 U.S.C. §§ 6501-23), the USDA is required to develop national standards for organic products.  USDA regulations are enforced through the National Organic Program (NOP) governing the manufacturing and handling of organic food products.  As enacted, the statute provides that an agricultural product must be produced and handled without the use of synthetic substances in order to be labeled or sold as “organic”.  But, under USDA regulations, a “USDA Organic” seal can be placed on products with at least 95% organic ingredients.  The 95 percent rule was challenged by a Maine organic blueberry farmer as being overly tolerant of non-organic substances and inconsistent with the statute, and the United States Court of Appeals for the First Circuit agreed, invalidated several of the regulations while scaling back the scope of other regulations.  Harvey v. Veneman, 396 F.3d 28 (1st Cir. 2005).  In response to the court’s opinion (and while the case was on appeal) the Congress amended OFPA.  Upon further review, the court determined that OFPA, as amended, permitted the use of synthetics as both ingredients in and processing aids to organic food. Harvey v. Johanns, 494 F.3d 237 (1st Cir. 2007).

Produce Safety Rule

In early 2011, the President signed into law the Food Safety Modernization Act (FSMA) of 2010.  21 U.S.C. §301, et seq. The FMSA gives the FDA expansive power to regulate the food supply, including the ability to establish standards for the harvesting of produce and preventative control for food production businesses. Beginning in 2018, the new rules will significantly impact many growers and handlers of fresh produce.

The FMSA also gives the FDA greater authority to restrict imports and conduct inspections of domestic and foreign food facilities. To implement the requirements of the FMSA, the FDA had to prepare in excess of 50 rules, guidance documents, reports under a short time constraint.  Indeed, the timeframe was so short FDA complained that they didn’t have enough time to do the job appropriately. That led to lawsuits being filed by activist groups to compel the FDA to issue several rules that were past-due. A federal court agreed with the activists in the spring of 2013 and, as a result, the FDA issued four proposed rules with comment periods that ended in November of 2013. Center for Food Safety v. Hamburg, 954 F. Supp. 2d 965 (N.D. Cal. 2013).  One of the most contentious issues involved the rule FDA was supposed to develop involving intentional adulteration of food. FDA said it needed two more years to develop an appropriate rule, but the Court ordered them to develop it immediately. The hope, at that time, was that the Congress would step in and modify the deadlines imposed on the FDA so that reasonable rules could be developed rather than being simply rushed through the regulatory process for the sake of meeting an arbitrary deadline.

In late 2015, the FDA issued its Final Produce Safety Rule that has application to growers and fresh produce handlers (those that pack and store fresh produce). The rule is designed to reduce the instances of foodborne illnesses. Effective, January 16, 2016, the rule generally covers the use of manure or compost as fertilizer, allowing (at least for the present time) a 90 to120-day waiting period between the application of untreated manure on land and the time of harvest. That timeframe is in accordance with USDA National Organic Program Standards. Relatedly, the rule requires that raw manure and untreated biological soil amendments of animal origin must be applied without contacting produce and post-application contact must be minimized. Also, the rule addresses water quality and establishes testing for water that is used on the farm such as for irrigation or handwashing purposes. Under the rule, there must be no detectible generic E coli in water that has the potential to contact produce. The rule establishes a timeframe for noncompliant growers to come into compliance with the water requirements. The rule also addresses scenarios that could involve contamination of food products by animals, both domestic and wild, and establishes standards for equipment, tools and hygiene. As for potential contamination by wild animals, the rule requires farmers to monitor growing areas for potential contamination by animals and not harvest produce that has likely been contaminated. In addition, the rule establishes requirements for worker training, health and hygiene, and particular rules for farms that grow sprouts.

Under the rule, farms that sell an average of $25,000 or less of produce over the prior three years are exempt. Similarly, exempt are farms (of any size) whose production is limited exclusively to food products that are cooked or processed before human consumption. For producers whose overall food sales average less than $500,000 annually over the prior three years where the majority of the sales are directly to consumers or local restaurants or retail establishments, a limited exemption from the rule can apply. However, these producers must maintain certain required documentation (effective Jan. 16, 2016) and disclose on the product label at the time the product is purchased the name and location of the farm where the food product originated. In addition, the rule also allows commercial buyers to require that the farms from which they purchase produce follow the rule on their own accord.

Conclusion

Food products – yet another aspect of agriculture that is substantially regulated.

July 25, 2019 in Regulatory Law | Permalink | Comments (0)

Thursday, June 27, 2019

Administrative Agency Deference – Little Help For Ag From the Supreme Court

Overview

A significant amount of governmental regulation of agricultural activities is conducted by and through administrative agencies that promulgate regulations and make decisions.  The rules for and scope of regulations is determined by unelected bureaucrats and often has the force of law.  In addition, much of administrative law involves the administrative agency that developed the regulation at issue serving as judge and jury over disputed matters involving those same regulations.  This raises fundamental questions of fairness. 

In theory, governmental administrative agencies cannot exceed the authority provided by the legislative body.  Ultimately, the courts serve as the check on the exercise of authority.  But, how?  Under what standard do the courts review administrative agency decisions?  It’s an issue that was addressed by the U.S. Supreme Court yesterday, and it didn’t turn out the way that many in agriculture had hoped.

Today’s post takes a deeper look at administrative agencies, how farmers and ranchers can best deal with them, and review of administrative agency determinations by the courts.  The deference provided to administrative agency decisions – that’s the topic of today’s post.

Administrative Agency Basics

At the federal level, the Congress enacts basic enabling legislation, but leaves the particular administrative departments (such as the USDA) to implement and administer congressionally created programs.  As a result, the enabling legislation tends to be vague with the administrative agencies (such as the USDA) needing to fill in the specific provisions by promulgating regulations.  The procedures that administrative agencies must follow in promulgating rules and regulations, and the rights of individuals affected by administrative agency decisions are specified in the Administrative Procedures Act (APA).  5 U.S.C. §§ 500 et seq.  The provisions of the APA constitute the operative law for many of the relationships between farmers and ranchers and the government.

Administrative Agency Procedure

Usually, a farmer or rancher's contact with an administrative agency is in the context of participation in an agency-administered program, or being cited for failure to comply with either a statutory or administrative rule.  So, it’s helpful for farmers and ranchers to have a general understanding of how administrative agencies work and the legal effects of their decisions.  In general, disputed matters involving administrative agencies must first be dealt with in accordance with the particular agency's own procedural rules before the matter can be addressed by a court of law.  This is known as exhausting administrative remedies.  7 U.S.C. §6912(e).  See also Johnston v. Patterson, No. 4:14-CV-210-BO, 2014 U.S. Dist. LEXIS 172224 (E.D. N.C. Dec. 12, 2014).  About the only exception to the rule of exhaustion occurs when a facial challenge is made to the regulation itself.  See Gold Dollar Warehouse, Inc. v. Glickman, 211 F.3d 93 (4th Cir. 2000)Thus, participating carefully in administrative proceedings can be vitally important to a farmer or rancher, especially in terms of properly preserving a record for subsequent court review. 

Going through the administrative process is critical because, typically, an appeal to a court of law is made only on the basis of the record generated in the administrative proceeding.  Courts are limited in the extent to which they can substitute their judgment for that of an administrative agency regarding the facts of the dispute.  Thus, it is critical to preserve all disputed factual and legal issues in the record of the administrative proceeding so that they can later be considered by a court.  The exhaustion of administrative remedies, as a general rule, also requires that legal issues must be raised during the administrative process so as to be preserved for judicial review.  If they are raised in the administrative process, then they will likely be precluded.  Also, exhaustion is required as to each legal issue.  See, e.g., Ballanger v. Johanns, 495 F.3d 866 (8th Cir. 2007).

What’s the Standard For Reviewing Agency Action?

Courts generally consider only whether the administrative agency acted rationally and within its statutory authority.  Consequently, a particular farmer or rancher bears the burden of insuring that the record is adequate for the appeal of the issues involved before the matter leaves the administrative process.  Otherwise, an appeal of an administrative agency's decision must be based solely on arguments that the agency acted arbitrarily, capriciously, beyond legal authority or that it abused its discretion. 

In general, when dealing with administrative appeals from a federal agency such as the USDA, the court generally defers to the agency’s interpretation of its regulations as contained in the agency’s interpretive manuals.  Prevailing in court on this type of a claim can be quite difficult. However, in Christensen v. Harris County, 529 U.S. 576 (2000), the U.S. Supreme Court ruled that statutory interpretations made by governmental agencies in pronouncements that do not have the force of law, such as opinion letters, policy statements, agency manuals, and enforcement guidelines, are not entitled to such great deference.  Christensen is a significant case for the agricultural sector because the USDA often makes interpretations of the laws they administer in formats that do not have the force of law. Similarly, in Meister v. United States Department of Agriculture, 623 F.3d 363 (6th Cir. 2010), the court noted than an agency is not entitled to deference simply because it is a governmental agency.  The case involved a claim that the U.S. Forest Service had failed to comply with its own regulations and a federal statute in developing its 2006 management plan for national forests in northern Michigan.  The trial court granted the government’s motion for summary judgment, but the appellate court reversed.  The appellate court noted that it was insufficient for the government to only identify the lands on which a particular activity (such as snowmobiling) could occur.  Instead, the government had to identify the supply of lands on which participants in particular activities would experience a quality recreational experience.  As a result, the issuance of the agency’s plan was arbitrary because the estimates of snowmobile and cross-country visitors to the forests were entirely arbitrary and there was no coordination with Michigan's recreational planning, and the agency did not minimize conflicts between off-road vehicle use and other uses and interests of the forests.  The court specifically noted that agency deference was not automatic.  Instead, the agency must apply the relevant statutory and regulatory authority.

On the deference issue, it was believed that a change might be in the wind.  In 1997, the U.S. Supreme Court again reiterated the principle of agency deference.  Auer v. Robbins, 519 U.S. 452 (1997).  This so-called “Auer deference” involves a court deferring (or give “controlling weight”) to agency interpretations of its own ambiguous regulations.  Another type of deference, known as “Chevron deference” involves a court deferring to an agency interpretation of ambiguous statutes that the agency administers.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). However, the Court, in 2013 criticized the Court’s 1997 decision and suggested that it might be time to reconsider principles of agency deference.  Decker v. Northwest Environmental Defense Center, 133 S. Ct. 1326 (2013).  

The amount of deference a court gives to agency interpretations of its own regulations is important to agriculture.  For example, the USDA administers the Packers and Stockyards Act (PSA).  The PSA, bars packers (and others) from engaging in any “unfair, unjustly discriminatory, or deceptive practice.” 7 U.S.C. §192(a). The PSA also prohibits the making or giving of any “undue or unreasonable preference or advantage” to any person.  7 U.S.C. §192(b).  The courts have construed this language to require harm to competition be shown to establish a violation.  In late 2016, the USDA published an interim final rule removing the requirement to show harm to competition to establish a violation.  But, the USDA later withdrew the rule.  The withdrawal of the rule was challenged as arbitrary and capricious (the standard for overturning agency action).  But, the Eighth Circuit denied the plaintiffs’ claims.  Organization for Competitive Markets v. United States Department of Agriculture, 912 F.3d 455 (8th Cir. 2018).  The court determined that the USDA, in abandoning the proposed rule, had provided a reasoned analysis based on principles that were “rational, neutral, and in accord with the agency’s proper understanding of its authority” – the USDA didn’t want to get sued.  The case is an example of deference toward a governmental agency’s actions. 

Yesterday, the U.S. Supreme Court addressed the issue of deference again in Kisor v. Wilkie, No. 18-15, 2019 U.S. LEXIS ___ (U.S. Sup. Ct. Jun. 26, 2019)The facts of the case didn’t involve agriculture.  That’s not the important part.  What is important is that the Court again reaffirmed (5-4, thanks to Chief Justice Roberts) Auer deference.  However, the Court did appear to place some limitations on Auer deference for future cases.  I say “appear” because the Court created a new multi-part test for review of agency action that could prove difficult for lower courts to apply and relatively easy for administrative agencies to skirt.  According to the Court, a court that reviews agency action is to review the regulatory language at issue to determine whether the regulation is ambiguous.  If it is, the court is to then apply Auer deference in determining whether the agency reached a reasonable conclusion resulting from the agency’s careful consideration and expertise after giving affected parties reasonable notice of the agency’s interpretation.  From agriculture’s perspective, it was hoped that the Court would jettison Auer deference.  That would have been the approach of Justice Gorsuch who would have eliminated the binding agency deference of Auer.  

So, the battle between agriculture and administrative agencies will continue on numerous fronts, and the arguments over the reasonableness of agency interpretations will continue with the courts largely deferring to agency determinations.  While there might be a dent in Auer deference, it still is a very functional defense to agency action. 

Attorney Fees

The Equal Access to Justice Act (EAJA) (5 U.S.C. §§504 (2008); 28 U.S.C. §2412(d)(2)(A)) provides that a party who prevails administratively against government action can recover fees and expenses if the administrative officer determines that the government’s position was not substantially justified.  However, the USDA’s longstanding position is that the EAJA does not apply to administrative hearings before the USDA’s National Appeals Division (NAD) because NAD proceedings are not adversarial adjudications that are held “under” the APA.  But, the United States Court of Appeals for the Eighth Circuit rejected the USDA’s position in 1997. Lane v. United States Department of Agriculture, 120 F.3d 106 (8th Cir. 1997). The Ninth Circuit ruled similarly in 2007. Aageson Grain and Cattle, et al. v. United States Department of Agriculture, 500 F.3d 1038 (9th Cir. 2007).  The Seventh Circuit ruled likewise in 2008.  Five Points Road Venture, et al. v. Johanns, 542 F.3d 1121 (7th Cir. 2008).

Conclusion

Dealing with administrative agencies is a reality for the typical farmer or rancher.  While ag didn’t get the clear victory it sought in Kisor, perhaps it’s a baby-step in the right direction.  Only time will tell.

June 27, 2019 in Regulatory Law | Permalink | Comments (0)

Wednesday, June 19, 2019

Classification of Seasonal Ag Workers – Why It Matters

Overview

Especially with respect to fruit and vegetable crops, seasonal ag workers are vital – particularly during harvest.  But is a seasonal ag worker an employee or an independent contractor?  What are the factors for determining the proper classification?  Why does classification matter?  Actually, it matters for several important reasons including withholding of income tax and the filing of the proper tax forms; whether minimum wage requirements apply; and applicable penalties for a misclassification.

During this spring’s academic semester at the law school, my students in agricultural law were required to write a paper on a particular ag law topic.  Today’s post features the work of one of those students - Rebecca Bergkamp.  Rebecca graduated last month, is presently preparing for the Bar exam, and will then join the Hinkle Law Firm in Wichita, Kansas.  She is well-trained to enter the practice world to begin assisting agricultural clients (among others) with their legal issues.

The proper classification of seasonal ag workers – that’s the topic of today’s post.

Rules Governing Classification of Workers

Under the Fair Labor Standards Act (FLSA), a worker is presumed to be an employee, unless the worker is specifically classified as an independent contractor. The term “employee” is very expansive and means any individual employed by an employer. 29 U.S.C. §203(e)(1).  This includes individuals who might not normally qualify as an “employee” under traditional agency principles.  Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 112 S. Ct. 1344, 1350 (1992).  Likewise, a contractual designation between a farmer and the worker that the worker is an independent contractor is not controlling for purposes of determining whether that worker is an employee or independent contractor. Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S. Ct. 1473, 1476-77 (1947).  Moreover, the subjective intentions of the parties are not controlling in determining whether an employer-employee relationship exists; it does not matter whether the parties had any intention of creating an employment relationship. Brennan v. Partida, 492 F.2d 707, 709 (5th Cir. 1974).

Factors for Consideration

So how is it determined whether an ag worker is an employee or a independent contractor?  An “economic realities” test is often used.  Under this test, the courts look to various factors in assessing the economic realities of the situation to determine whether an individual is an employee, or an independent contractor.  Those factors are:  (1) the nature and degree of the worker’s control of the manner in which the work is to be performed (the less control the worker has, the more likely the worker is an employee); (2) the  worker’s opportunity for profit or loss depending upon his or her managerial skill (the less opportunity, the more likely the worker is an employee); (3) the degree of the worker’s own investment in equipment or materials required for the work or employment of other workers (the greater degree, the more likely the worker is an independent contractor); (4) whether the service rendered requires a special skill, (if so, the more likely is independent contractor classification); (5) the degree of permanency and duration of the working relationship of the parties (the longer and more permanent the relationship, the more likely employee classification will be); and (6) the extent to which the services rendered are an "integral part" of the business (the greater the extent, the more likely is employee status). No single factor is determinative.  See, e.g., Blair v. Transam Trucking, Inc., 309 F. Supp. 3d 977, 1002 (D. Kan. 2018); Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748 (9th Cir. 1979); In re Kokesch, 411 N.W.2d 559 (Minn. Ct. App. 1987); Mendez v. Brady, 618 F. Supp. 579 (W.D. Mich. 1985); Tobin v. Cherry River Boom & Lumber Co., 102 F. Supp. 763 (S.D. W. Va. 1952).

Although a farmer may have to classify many of its workers as employees due to the application of the economic realities test, a farmer is not required to classify immediate family members as employees. For the purposes of agriculture, the term “employee” does not include workers who are a parent, spouse, child, or other immediate family members.  29 U.S.C. §203(e)(3). This is an important exception for many family farming operations. 

Why Classification Matters

There are various reasons for classifying a worker either as an employee or as an independent contractor.

  • For many farmers, it’s simply easier to classify seasonal workers as independent contractors and pay them with a checks and issue Forms 1099 at year end.  In addition, independent contractors are responsible for paying both the employer and employee portion of Social Security and Medicare taxes.
  • For tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) provides for a 20 percent deduction for the “qualified business income” of an independent contractor that is other than a C corporation. Wages of an employee don’t qualify. 
  • The staffing flexibly of independent contractors can be very beneficial and, if the farming operation is in a state that has at-will employment, employees can terminate the working relationship at any time for any reason. In contrast, an independent contractor’s ability to terminate a working relationship with a farmer is governed by a contract that the parties have negotiated.   
  • If a worker is an employee, the farmer-employer, has greater control over how, when, and which projects are completed at any given time. But, the use of an independent contractor provides the farm operation the flexibility of being able to acquire talent for a specific period of time without having to maintain an ongoing commitment, financial or otherwise.

What About Minimum Wage and Overtime Pay Requirements?

If a worker is an “employee,” the FLSA requires agricultural employers who use 500 “man-days” or more of “agricultural labor” in any calendar quarter of a particular year to pay the agricultural minimum wage to certain agricultural employees in the following calendar year.  29 CFR § 780.305. Man-days are those days during which an employee performs any agricultural labor for not less than one hour.  The man-days of all agricultural employees count in the 500 man-days test, except those generated by members of an incorporated employer's immediate family.  29 U.S.C. § 203(e)(3).  Five hundred man-days is roughly equivalent to seven workers working five and one-half days per week for thirteen weeks (5.5 x 7 x 13 = 501 man-days). Under the FLSA, “agriculture” is defined broadly.  See 29 U.S.C. § 203(f).  For related entities, where not all of the entities involve an agricultural trade or business, the question is whether the business operations are so intertwined that they constitute a single agricultural enterprise that is exempt from the minimum wage rules.  See, e.g., Ares v. Manuel Diaz Farms, Inc., 318 F.3d 1054 (11th Cir. 2003).

Other agricultural exceptions from the minimum wage requirement include persons that are:  (1) members of the employer's immediate family, unless the farm is incorporated; (2) local hand-harvest, piece-rate workers who come to the farm from their permanent residences each day, but only if such workers were employed less than 13 weeks in agriculture in the preceding year; (3) children age 16 and under whose parents are migrant workers, and who are employed as hand-harvest piece-rate workers on the same farm as their parents, provided that they receive the same piece-rate as other workers; and (4) employees engaged in range production of livestock. 29 U.S.C. § 213(a)(6).  A higher monthly wage rate applies to a “ranch hand” who does not work in a remote location and works regular hours.  See, e.g., Mencia v. Allred, 808 F.3d 463 (10th Cir. 2015)

Overtime Pay

If a worker is classified as an “employee,” the FLSA requires payment of at least one and one-half times an employee’s regular rate for work over 40 hours in a week.  However, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12).  Again, for this purpose, “agriculture” is defined broadly, and the 500 man-days test is not relevant.  There are also certain workers that are exempt from being paid for hours worked that exceed 40 hours in a week.  Included in this category are those “executive” workers whose primary duties are supervisory, and the worker supervises two or more employees.  Also included are workers that fall in the “administrative” category who provide non-manual work related to the management of the business.  Also exempt are those workers defined as “professional” whose job is education-based and requires advanced knowledge.  Many larger farming and ranching operations have employees that will fit in at least one of these three categories. 

Income Tax Withholding

For employees, the employer must withhold federal (and state) income tax.  The withholding of tax from an individual’s wages is “treatment” of the individual as an employee.  See, e.g., Priv. Ltr. Rul. 8323004 (Feb. 21, 1983).   Also, it’s not possible to retroactively change the “treatment” of the workers as employees by filing Forms 941c (the Form for correcting withholding information) and requesting a refund of FICA taxes.  Even assuming the farmer could do so, the farmer would be prevented from claiming workers as nonemployees for years he did not file the proper federal information tax returns.  Likewise, “Section 530 relief” is not available to those taxpayers who did treat workers as employees by filing Forms 943 and withholding FICA taxes.  It also doesn’t apply to those who treated workers as employees as a result of past audits.

Misclassification

One of the biggest risks in hiring “independent contractors” is misclassification because it can result in violations of wage, tax, and employment laws.  Penalties can also be imposed for failing to timely deposit payroll taxes. Fines from the U.S. Department of Labor (DOL), IRS, and state agencies could total thousands of dollars. Farmers can be held responsible for paying back-taxes and interest on employee’s wages as well as FICA taxes that were not originally withheld. Failure to make these payments can result in additional fines. If the misclassification is found to be intentional, criminal penalties can apply.  In addition, for employees, an employer must keep Form I-9 on record for each employee to establish employment eligibility.  

Conclusion

Careful thought must be given to the proper classification of ag workers.  The issue is particularly acute with respect to seasonal ag workers.  Misclassifying can lead to serious consequences. 

June 19, 2019 in Regulatory Law | Permalink | Comments (0)

Monday, June 17, 2019

Eminent Domain and Agriculture

Overview

Eminent domain is the power of a state to take private property for public use consistent with the state’s constitution.  In many states, the power has been legislatively delegated to municipalities, government subdivisions, as well as private persons and private corporations.  Sometimes, the exercise of eminent domain intersects with agriculture, particularly when a pipeline is being put in or a wind energy company wants to erect industrial wind towers and landowners object.

How broad is the power of eminent domain?  How do the federal and state constitutions protect private property?  What does “public use” mean?  Can a private company exercise eminent domain? 

The exercise of eminent domain at the state level and the impact on agriculture – that’s the focus of today’s post.

The Power to “Take” Property

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state government. However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  U.S. Const. 5th Amend.  The “takings” clause of the Fifth Amendment has been held to apply to the states since 1897. Chicago, Burlington and Quincy Railroad Co., v. Chicago, 166 U.S. 226 (1897).

The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” Just compensation” equals fair market value, generally in cash. For partial takings, “severance damages” may be awarded in addition to compensation for the part taken. See, e.g., Sharp v. United States, 191 U.S. 341 (1903).  The clause has two prohibitions: (1) all takings must be for public use; and (2) even takings that are for public use must be accompanied by compensation. 

What Does “Public Use” Mean?

Historically, the “public use” requirement operated as a major constraint on government action. For many years, the requirement was understood to mean that if property was to be taken, it had to be used by the public – the fact that the taking was “beneficial” was not enough. Eventually, however, courts concluded that a wide range of uses could serve the public even if the public did not, in fact, have possession. Indeed, so many exceptions were eventually built into the general rule of “use by the public” that the rule itself was abandoned. In 1954 and again in 1984, the U.S. Supreme Court demonstrated its willingness to define expansively “public use,” and confirmed the ability of a state to use eminent domain power to transfer property outright to a private party, so long as the exercise of the eminent domain power was rationally related to a conceivable public purpose.

In recent years, however, state courts have split on the issue of whether the government’s eminent domain power can be exercised to take private homes and businesses for the development of larger businesses by private companies. The argument is that the larger businesses enhance “economic development” that increases jobs and tax revenue in the area and that this satisfies the Fifth Amendment’s “public use” requirement.  However, in Bailey v. Myers, 206 Ariz. 224, 76 P.3d 898 (Ariz. Ct. App. 2003), the court determined that the condemnation of private property for redevelopment and sale to private parties was unconstitutional because the proposed use of the property was not public.  Similarly, the Michigan Supreme Court has ruled that the exercise of the eminent domain power is proper only if (1) the private entities involved are public utilities that operate highways, railroads, canals, power lines, gas pipelines, and other instrumentalities of commerce; (2) the property remains under the supervision or control of a governmental entity; or (3) the public concern is accomplished by the condemnation itself (i.e., blighted housing has become a threat to public health and safety). County of Wayne v. Hathcock, 684 N.W.2d 765 (Mich. 2004).

 In 2005, the Supreme Court clarified the difference among the states by again ruling that the eminent domain power can be exercised on behalf of a private party for economic development that benefits the public by increasing jobs and the tax base in the area. Kelo, et al. v. City of New London, 545 U.S. 469 (2005)Thus, if the exercise of eminent domain for a private party is done in conjunction with a development plan and does not involve obvious corruption, the taking will be allowed (and compensation will have to be paid).  While the Supreme Court’s Kelo decision was a landmark one, the Court clearly deferred to states on the issue.  At the federal level, if the condemnation of property is rationally related to a legitimate purpose of government (rather low hurdle to overcome) the taking will be approved.  But, any particular state could restrict the exercise of eminent domain on behalf of private parties if they so desired. 

In the wake of Kelo, several states either amended the state statutory process for proceedings involving condemnation of private property, or have amended the state constitution. Shortly after the Kelo decision, the Ohio Supreme Court has held that a taking providing nothing other than an economic benefit violates the Ohio constitution. City of Norwood v. Horney, 853 N.E.2d 1115 (Ohio 2006). The Ohio Supreme Court has previously held that Ohio landowners have a property interest in the groundwater underlying their land such that governmental interference with that right can constitute a taking. McNamara v. City of Rittman, 838 N.E .2d 640 (Ohio 2005)

What Does “Property” Mean?

The term “property” in the context of eminent domain, connotes all types of ownership interests – fee simple; partial interests; future interests; surface interests and even, perhaps, sub-surface interests.  For example, in The Edwards Aquifer Authority, et al. v. Day, et al. 369 S.W.3d 814 (Tex. Sup. Ct. 2012), the Texas Supreme Court unanimously held, on the basis of oil and gas law, that landownership in TX includes interests in in-place groundwater.  As such, water cannot be taken for public use without adequate compensation guaranteed by Article I, Section 17(a) of the TX Constitution. In the case, the plaintiffs were farmers that sought permit to pump underground water for crop irrigation purposes. The underground water at issue was located in the Edwards Aquifer and the plaintiffs' land was situated entirely within the boundaries of the aquifer. A permit was granted, but water usage under the permit was limited to 14 acre-feet of water rather than 700 acre-feet that was sought because the plaintiffs could not establish "historical use." The Court determined that the plaintiff's practice of issuing permits based on historical use was an unjustified departure from the Texas Water Code permitting factors.

Recent Case – The Dakota Access Pipeline

A recent opinion issued by the Iowa Supreme Court involving a pipeline seeking to exercise eminent domain, illustrates the intersection of the concept with agriculture.  In Puntenney, et al. v. Iowa Utilities Board, No. 17–0423, 2019 Iowa Sup. LEXIS 69 (Iowa Sup. Ct. May 31, 2019), the Court was faced with the Dakota Access Pipeline that sought to use eminent domain against farmland owners so that its pipeline could be completed.  The pipeline was piping oil from the oil fields of northwest North Dakota to southern Illinois. In 2014, the pipeline company filed documents with the Iowa Utilities Board (IUB) signifying its intent to lay a pipeline. The pipeline would traverse Iowa from the northwest corner to the southeast corner of the state, passing through eighteen counties over approximately 343 miles. At the end of 2014, the pipeline company held meetings in all eighteen counties.

In 2015, the pipeline company petitioned the IUB to start construction and sought “the use of the right of eminent domain for securing right of way for the proposed pipeline project” due to several landowners in the path of the pipeline refusing to grant an easement. The pipeline asserted such authority as a “common carrier” (a public or private entity that carries goods or people). In November and December of 2015, the IUB held hearings on the petition. Hundreds of people were present to give testimony for both sides. On March 10, 2016, the IUB issued a 159-page final decision and order. This order found that the pipeline would promote the public convenience and necessity, involve a capital investment in Iowa of $1.35 billion, and generate $33 million in Iowa sales tax during construction and $30 million in property tax in 2017. The order also noted that the pipeline had utilized a software program to lay the pipeline’s path to avoid critical areas, and that state law gave the pipeline the power to exercise eminent domain where necessary. After the IUB’s issuance of the order, several motions for clarification and rehearing were filed, which the IUB denied. Numerous parties sought judicial review of the order, and the parties were consolidated into a single case. On February 15, 2017, the trial court denied the petitions for judicial review.

On further review, Iowa Supreme Court addressed numerous issues. The Court determined that the Iowa Chapter of the Sierra Club had standing under state law on behalf of its affected members.  Those members, the Court noted under Iowa law, did not need to be landowners, just aggrieved or adversely affected by “agency action.”  On the legal issues, the Court looked at the standing of the parties. While the pipeline had already largely been constructed, the Court determined that the matter was not moot because the IUB retained the authority to impose other “terms, conditions, and restrictions” in the petitioners’ favor. On the IUB’s authority to issue a construction permit to the pipeline company based on the promotion of public convenience and necessity, the Court determined that the IUB’s decision to grant the permit was not “[b]ased upon an irrational, illogical, or wholly unjustifiable application of law” and its factual determinations were supported by “substantial evidence.” The Court noted that the evidence showed that the pipeline would reduce oil transport costs which would provide a lower price for petroleum products; transport oil more safely than rail; and provide secondary economic benefits to the citizens of Iowa. However, the Court did conclude that private economic development, by itself, is not a valid “public use.”  Thus, the Court rejected the U.S. Supreme Court’s holding in Kelo - joining Illinois, Michigan, Ohio and Oklahoma. The Court also did not find any violation of the statutory limit on the use of eminent domain with respect to farmland because the pipeline company was a common carrier under the IUB’s jurisdiction – an entity not statutorily limited on the use of eminent domain on farmland. Thus, the Iowa Constitutional provision on the use of eminent domain was not violated, nor was the Fifth Amendment of the U.S. Constitution. The Court also upheld the IUB’s determination that the pipeline route was proper and need not be rerouted based on speculative surface development, but did conclude that the pipeline be laid under existing field drainage tile where necessary.

Conclusion

The use of eminent domain at the state level and taking of private property at the federal level is a significant concern for many farmers and ranchers.  Certainly, the government must pay for what it takes (the issue of compensation is a topic for another day), but the extent to which a public use must be present is a key issue.  The recent Iowa decision sheds some light on the question – at least in Iowa. 

June 17, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Thursday, June 13, 2019

Prevented Planting Payments - Potential Legal Issues?

Overview

Weather conditions in the Midwest and the crop-growing regions of the Great Plains have made it likely that prevented planting payments will be utilized by a greater percentage of impacted farmers this summer.  If that happens, what are the regulatory and legal rules that kick-in that the recipient-farmer becomes subject to?

Prevented Planting Payments

The crop insurance final planting dates for corn have passed, but many areas of the soybean growing region (basically south of Minnesota and east of Nebraska) still have final planting dates for soybeans that remain but will expire soon.  A farmer must weigh options of changing crops, planting soybeans or simply not planting at all.   The economics of the situation will dictate the outcome.  Crop insurance companies can provide guidance on eligible acres and production practices and the applicable rules for prevented planting payments.  It’s also important to know what neighboring farmers are doing.  Being the only farmer in a particular area to utilize prevented planting payments is not a good thing.  If that happens, crop insurance adjusters and underwriters may could suddenly become reluctant to allowing payment on the claim.

Legal and Regulatory Matters

The governing statute on prevented planting payments is 7 U.S.C.  §1508a.  The language contained in that statute defines such things as “first crop,” “second crop,” and “replanted crop.”  It then lays out the options that a producer has when a “first crop” is lost and what the rules are when a “second crop” is planted.  Also, specified is the effect on actual production history and the area conditions that are required for payment.  Also, detailed are the exceptions for established double cropping practices, among other things.

As with participation in any federal government farm program, the participating farmer becomes subject to the regulatory and legal framework of the particular program.  That means that any dispute must be appealed to a final decision through the administrative process before redress can be available in the judicial system.  Failure to preserve the administrative record can result in a court being unable to provide a remedy even though it may be clear that the farmer should prevail.  That’s not a good position to be in. 

Recent Prevented Planting Court Decisions

It is common for a prevented planting dispute to end up in arbitration.  Two recent federal court opinions have concerned the operation of the arbitration process with respect to prevented planting payments.

A case from Nebraska involved the statutory time limit for the notice of application to vacate a crop insurance arbitration award and whether that statutory time limit could be waived.  In Karo v. NAU Country. Ins. Co., 901 N.W.2d 689, 297 Neb. 798 (2017), the plaintiffs farmed together in Holt County, Nebraska. They each obtained federally reinsured crop insurance policies that the defendant serviced.  In 2012, the plaintiffs submitted “prevented planting” claims under their crop insurance policies, claiming they were unable to plant corn on certain acres due to wet conditions. The defendant denied the plaintiffs’ prevented planting claims, finding that excessive moisture was not general to the surrounding area and did not prevent other producers from planting acres with similar characteristics.  Pursuant to the mandatory arbitration clause in the policies, the parties submitted their disputes to binding arbitration.

The arbitrator issued a final arbitration award in favor of the defendant on January 21, 2014. On May 15, 2014, the plaintiffs filed a petition for judicial review in the Holt County District Court seeking to vacate the arbitration award under §10 of the Federal Arbitration Act (FAA) which provides “the district court wherein the award was made may make an order vacating the award upon the application of any party to the arbitration. . . where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The district court granted the plaintiffs’ summary judgment motion and vacated the arbitration award finding that the arbitrator exceeded his powers and manifestly disregarded the law.

The defendant appealed, but failed to note in the appeal that the plaintiffs did not meet the three-month time limit for appealing. Consequently, because the defendant did not raise the issue of the violation of the three-month limit, the appellate court had to determine whether the time limit was jurisdictional in nature and, thus, could not be waived even if the parties do not raise the issue. According to the U.S. Supreme Court, absent such a clear statement, the restriction should be treated as non-jurisdictional in character. Section 9 of the FAA which enumerates the notice requirements for judicial confirmation expressly states that after service of proper notice “the court shall have jurisdiction over the adverse parties to the arbitration.” Consequently, the appellate court determined that this was a clear indication that Congress intended the statutory requirements for service notice of an application for expedited judicial review under the FAA to be jurisdictional in nature. The appellate court held that although different timeframes apply for serving notice under section 9 and section 12 of the FAA, there is no difference in the mandatory process by which the adverse party must be served with notice and no difference in the practical purpose for requiring such notice. Thus, it would make little sense for Congress to give clear jurisdictional weight to service notice in one context but not the other.

In addition, the appellate court saw no indication in the statute that Congress intended the notice requirements for expedited judicial review to be jurisdictional when a party seeks judicial confirmation, but not jurisdictional when a party seeks judicial vacatur or modification. Consequently, the court determined that whether an arbitrating party is applying for judicial review to confirm and award under section 9 or to vacate or modify an award under section 10 and 11, Congress intended that party’s failure to serve notice of the application within the mandatory time limits, would have jurisdictional consequences. Because the appellate court concluded that the three-month requirement is jurisdictional in nature and the plaintiffs failed to comply with the three-month requirement the district court did not have authority under the FAA to vacate the arbitration award.  Because the district court didn’t have jurisdiction to enter a judgment vacating the arbitration award under the FAA, the district court’s judgment was void.  That meant that the appeal from the district court’s judgment didn’t confer any appellate jurisdiction on the appellate court – the Nebraska Supreme Court.  The district court’s judgment was vacated and the appeal was dismissed for lack of jurisdiction. 

In a more recent case from North Carolina, an arbitrator’s award was vacated.  In Williamson Farm v. Diversified Crop Insurance Services, No. 5:17-cv-513-D, 2018 U.S. Dist. LEXIS 49249 (E.D. N.C. Mar. 26, 2018), the plaintiff, a farming partnership, bought crop insurance from the defendant for the 2013 crop year. The plaintiff intended to buy full crop coverage on all planted acres, and the defendant’s agents represented that the coverage purchased was full coverage. The plaintiff incurred a loss on one parcel, and was prevented from planting on two other tracts. The plaintiff filed claims for the losses under the policy and the defendant denied coverage on the basis that one tract on which the claim was made was listed under the policy as being in a different county and the tracts on which the plaintiff was prevented from planting crops were improperly claimed on an Farm Service Agency report. The defendant conceded that the errors were the fault of the defendant’s agents.

The plaintiff sought arbitration pursuant to the policy and was awarded coverage on the claims and treble damages. The arbitrator’s award was based on legal theories of negligence, breach of fiduciary duty, constructive fraud and violation of state (NC) law. The defendant challenged the arbitrator’s award as beyond the scope and authority of the arbitrator insomuch as the arbitrator engaged in interpreting the meaning, scope and applicability of the crop insurance policy at issue rather than obtaining an interpretation from the Federal Crop Insurance Corporation (FCIC).

The court agreed, noting that 7 U.S.C. §1506(l) pre-empts the arbitrator’s award unless FCIC procedures had been followed. The court also noted that the treble damages were based on the arbitrator finding a violation of NC law involving unfair and deceptive trade practices without first seeking a ruling from the FCIC. Accordingly, the court vacated the award as being beyond the arbitrator’s authority.  On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed.  Williamson Farm v. Diversified Crop Ins. Services, 917 F.3d 247 (4th Cir. 2019)

Conclusion

The decision whether to plant a crop or simply file for prevented planting payments is an important one.  In that decisionmaking process will be included the notion that this spring’s second round of market facilitation payments can only be received if a crop is planted.  That’s a key point.  But, once a claim is filed, the regulatory and administrative process kicks-in.  Those rules can be complex and confusing.  Another good reason to have an attorney specially trained in agricultural law matters at your side.

June 13, 2019 in Insurance, Regulatory Law | Permalink | Comments (0)

Thursday, May 30, 2019

Can Foreign Persons/Entities Own U.S. Agricultural Land?

Overview

During the significant economic downturn of early 2008 that continued through mid-2009 and then turned into an anemic recovery until 2017, foreign investors sought U.S. farmland as an alternative to stocks.  This has caused concern in some corners of ag. It’s an issue of national security – potentially disloyal parties should not be owning the U.S. real estate food base.  As of the end of 2016, the USDA reported that foreign individuals and entities held interests in 28.3 million acres of U.S. agricultural land.  That amounts to 2.2 percent of all privately held U.S. ag land and about one percent of all U.S. land.  This has also raised questions about whether there are laws are on the books that might protect American soil from being owned by foreign persons and interests.

Foreign ownership of agricultural land – that’s the topic of today’s post.

Historically

Under the English common law, aliens could not acquire title to land except with the King's approval.  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.

Federal Law

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 currently idle, land last used within the past five years, for farming, ranching, or timber production, except land not exceeding ten acres in the aggregate, if the annual gross receipts from the sale of the farm, ranch, or timber products produced thereon do not exceed $1,000.  7 C.F.R. § 781.2(b).

The reporting provisions of the AFIDA require the disclosure of considerable information regarding both the land and the reporting party.  Individuals who are not U.S. citizens, and have purchased or sold agricultural land must report the transaction to the USDA’s FSA with 90 days of the closing.   The information must be reported on Form FSA-153, and failure to do so can result in civil penalties of up to 25 percent of the fair market value of the property.  The information to be disclosed 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) the agricultural purposes for which the agricultural land is being used and for which the foreign person intends to use the agricultural property; and (8) such other information as the Secretary of Agriculture may require by regulation.  7 U.S.C. § 3501(a)(9) 

State Restrictions

While federal law requires informational reporting, some states have enacted statutes designed to restrict alien ownership of real property.  The state laws 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 non-agricultural 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, thirty states restrict agricultural land acquisition by aliens.  Consider the following three states as examples of states that have more restrictive provisions:

 

  • Iowa - Presently, Iowa has the most restrictive limitation on nonresident alien ownership of any state in the United States. Iowa Code §9I.  The Iowa restriction provides that a “nonresident alien, foreign business, or foreign government, or an agent, trustee or fiduciary thereof, shall not purchase or otherwise acquire agricultural land in this state.” A major exception exists that allows restricted parties to acquire up to 320 acres of agricultural land for “an immediate or pending use other than farming” if the conversion is completed within five years, and annual reports on the progress of the conversion are made.  In addition, during the five-year period, the land can only be farmed on lease to a family farm, a family farm corporation, or an authorized farm corporation. The Iowa law also provides that agricultural land acquired by nonresident aliens by devise or descent must be divested within two years.  However, if the land is acquired by devise or descent from another nonresident alien, it need not be divested, unless the nonresident alien originally acquired the land in the six months preceding enactment of the law. 

 

  • Under the Minnesota law, no natural person (unless a United States citizen or a permanent resident alien of the United States) can acquire, directly or indirectly, any interest in agricultural land, including leaseholds. Minn. Stat. Ann. § 500.221.1.  Foreign corporations cannot, either directly or indirectly, acquire or obtain any interest in title to agricultural land unless at least 80 percent of each class of stock issued and outstanding or 80 percent of the ultimate beneficial interest of the entity is held, directly or indirectly, by United States citizens or permanent resident aliens.  Land can be acquired by devise, inheritance, as security for indebtedness, by process of law in the collection of debts, or by enforcement of a lien, but land acquired in these fashions must be divested within three years of acquisition.  Similarly, land or interests acquired in connection with mining and mineral processing operations are permissible but, pending development for mining purposes, the land can only be used for farming on lease to a family farm, family farm corporation or authorized farm corporation. Another exception exists for agricultural land operated for research or experimental purpose if the total acreage does not exceed that held on May 27, 1977.

 

  • Missouri law prohibits aliens and foreign businesses from acquiring by grant, purchase, devise or descent, agricultural land in the state. Mo. Rev. Stat. §§ 442.560-442.592.  Under the legislation, “alien” is defined as any person who is not a citizen of the United States and who is not a resident of the United States or its holdings.  Mo. Rev. Stat. § 442.566(2).  A “foreign business” is defined as “any business entity whether or not incorporated, including but not limited to corporations, partnerships, limited partnerships, and associations in which a controlling interest is owned by aliens.” Mo. Rev. Stat. § 442.566(4). Agricultural land is defined as any tract consisting of more than five acres whether inside or outside the corporate limits of any municipality, which is capable of supporting an agricultural enterprise including production of agricultural crops, livestock, poultry and dairy products. Farm leasehold interests of ten years or longer or a lease renewable at the lessee's option for greater than ten years are treated as the acquisition of agricultural land.  An exception exists for agricultural land acquired for immediate or potential use in non-farming purposes, but the exception is limited to that amount of land necessary for the nonfarm business operation.  While the nonfarm activity is being developed, the land may only be farmed under lease to a family farm unit, family farm corporation, or a registered alien or foreign business.  The Missouri legislation also contains a reporting requirement requiring any foreign person holding any interest (other than a security interest) in agricultural land to submit a detailed report to the Director of Agriculture within 60 days, except for land used for the production of energy-related minerals.  The information required to be submitted includes the name and address of the foreign person, the citizenship of foreign individuals, the type of interest in acquired land held or transferred, a legal description of the land, the purchase price or consideration paid or received, information concerning transferees, and the declaration of the type of agricultural activity engaged in or the nonfarm purpose for which the land was acquired.  Failure to file a required report is subject to civil fine.

Other states that restrict foreign interests in ag land in one form or another (some restrictions are very minor) are:  Alabama, Alaska, Arkansas, California, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Virginia, Washington, Wisconsin and Wyoming.

Conclusion

While there is no bar on foreign ownership of agricultural land at the federal level, a majority of states have some sort of restriction.  In many of these states, those restrictions are minor.  The states with the most extensive restrictions tend to be in the center of the country.  Other states have no restrictions at all or place the same restrictions on foreign individuals or entities as they do domestic ones.

May 30, 2019 in Regulatory Law | Permalink | Comments (0)

Thursday, May 16, 2019

Ag Antitrust - Is There a Crack in the Wall of the “Mighty-Mighty” (Illinois) Brick House?

Overview

The markets for the major ag products in the U.S. are highly concentrated.  This is the case in the markets for hogs and poultry as well as food processing and the market for genetic characteristics of corn, soybeans and cottonseed.  The retail sector involving many ag products is also highly concentrated. This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers.  In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food?  If so, what can a farmer or rancher do about it?  Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party?  The U.S. Supreme Court recently decided a case involving the Apple Co. and IPhone users that involves some of these concepts.  Does it have implications for farmers and ranchers?

That’s the topic of today’s post – the ag implications of the recent Supreme Court decision involving Apple Inc. and IPhone users.  I have asked Peter Carstensen, Professor of Law Emeritus at the University of Wisconsin School of Law to collaborate with me on today’s post.  Peter is a Senior Fellow of the American Antitrust Institute, and formerly worked in the antitrust division of the U.S. Department of Justice.  You will find rather interesting his thoughts on the implications of this week’s Supreme Court decision for agriculture. 

Antitrust and Indirect Purchasers

The 1977 U.S. Supreme Court decision.  The questions posed above are interesting.  From a legal standpoint, what can a farmer or rancher do if they believe that they have been improperly harmed by anticompetitive conduct?  In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured.  In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between. For example, assume manufacturers or food retailers operate in a concentrated market and agree to fix the prices of their products and then sell those products to wholesalers or retailers (their direct customers).  The wholesalers and retailers then resell the goods either to other entities down the supply chain or to end consumers (i.e., indirect purchasers).  It’s those indirect purchasers that the 1977 Supreme Court decision bars from seeking damages because the court feared that defendants would be exposed to multiple claims for recovery and there would be complications in apportioning damages among the plaintiffs in the supply chain. The same reasoning has been applied to farmer claims where the alleged source of harm is a downstream conspiracy by retailers. Indirectly injured parties can still seek injunctive relief, but private lawyers are unlikely to take such cases despite the statutory right to a reasonable attorney’s fee if they succeed.  Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)).  In these states, indirect purchasers can seek recovery under state antitrust laws. 

Recent Supreme Court opinion.  In Apple Inc. v. Pepper, et al., No. 17-204, 2019 U.S. LEXIS 3397 (U.S. Sup. Ct. May 13, 2019), IPhone users sued Apple Inc. over its operations of the App Store.  The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick.  The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018)On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote.  Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices.  Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer.  Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.

The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply.  In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly.  The opinion acknowledged that there could be some difficult issues as to damages because if Apple took a lower commission (mark-up) on the apps, the app seller might have raised its prices.  Hence, the actual damages to the buyers might be difficult to calculate.  Moreover, the opinion pointed out that the developers could have a claim for damages as a result of lost sales resulting from the excessive commission charge if they would have kept a lower retail price. 

The dissent argued that the better interpretation of Illinois Brick was to focus on the party setting the price, here the developers.  Hence, they alone should have standing to claim that any Apple monopoly had harmed them as the first victim.  The dissent stressed the problems of determining damages for both upstream and downstream victims given that the majority had held that both could sue.

Thus, the court was unanimous that the Illinois Brick rule should remain.  It rejected the argument of a group of 30 states set forth  in an Amicus Brief urging the Court to reverse Illinois Brick and allow indirect purchasers with damage claims to have access to the federal courts. However, the majority decision appears to reject the use of formal contracts to determine who is the first buyer.  This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct.  However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods.  In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments.  The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.

Implications for Agriculture

The following are Prof. Carstensen’s thoughts on the ag implications of the Pepper decision:

Because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law.  Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm.  This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages.  This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation.  In addition, the decisions have required that there be an adverse effect on consumers and not just producers.  The Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries.  In future PSA cases proof of harm to producers should establish “harm to competition.”  Of course, a better understanding of the PSA, consistent with its application in various contexts such as buyer defaults and false weighing, is that its purpose is to protect individual farmers from unfair and discriminatory conduct.  But that issue must await a court willing to interpret the PSA’s provisions correctly.

Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers).  The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer.  Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way.  In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer.  This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.

Conclusion

In Pepper, the Supreme Court reaffirmed the Illinois Brick rule.  However, it employs a functional analysis to identify the first buyer (seller).  This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings.  But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers.  Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages.  But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.

The Pepper decision is not much of a crack in the (Illinois) brick house.  A small dent perhaps, but not a foundational crack.  “Ow…a brick house.”…

May 16, 2019 in Regulatory Law | Permalink | Comments (0)

Friday, March 29, 2019

More Recent Developments in Agricultural Law

Overview

The developments in agricultural law and taxation keep rolling in.  Many of you have requested more frequent posts on recent developments, so today’s post is devoted to just a handful that are important to farmers, ranchers and the professionals that represent them.  In today’s post I take a look at a couple of recent farm bankruptcy cases, the use of a trust to hold farm and ranch property, and the rights of grazing permit holders on federal land.

Selected recent developments in agricultural law and tax – it’s the topic of today’s post.

Bankruptcy

Times continue to be difficult in agriculture with bankruptcy matters unfortunately taking on increased significance.  In one recent case, In re Wulff, No. 17-31982-bhl, 2019 Bankr. LEXIS 388 (Bankr. E.D. Wis. Feb. 11, 2019), the debtor filed Chapter 12 bankruptcy and submitted a complete list of creditors. One of the creditors did not receive notice of the bankruptcy because of a bad address but became aware of the debtor’s bankruptcy upon attempting to collect on their account after the proof of claim deadline had passed. There were multiple plans submitted to the court that were rejected for various reasons, but every plan submitted accounted for the creditor that did not have notice. Ultimately, the debtor’s plan was confirmed. After confirmation, the creditor attempted to file a proof of claim and the trustee objected. The creditor maintained that it filed as soon as receiving notice of the proceedings. The court allowed the claim, but that the creditor had not established grounds for an extended timeframe to file the proof of claim. Even so, the court noted that the debtor’s initial plan and amended plans all accounted for the creditor’s claim. All the plans were consistent with the creditor’s late-filed proof of claim. Thus, the court confirmed the debtor’s reorganization plan with the late-filed proof of claim upon a finding that it was consistent with the plan. 

In another bankruptcy case, In re Smith, Nos. 17-11591-WRS, 18-1068-WRS, 2019 Bankr. LEXIS 234 (Bankr. M.D. Ala. Jan. 29, 2019), the debtor filed bankruptcy in 2017. At the time of filing, the debtor had a 2006 loan secured by his farmland that had matured. Instead of foreclosing, the creditor bank and the debtor negotiated a renewal in 2012. Another creditor, an agricultural cooperative, held a 2009 lien. In determining priority, the court held that the bank’s liens were prior to the cooperative’s liens. The court determined that the 2012 renewal of the bank note, even if the bank new of the cooperative’s lien, did not cause the bank to lose priority. While the court noted that sometimes an advancement on an existing mortgage causes the underlying mortgage to lose priority over subsequent liens, the court determined that the 2012 renewal was not an advancement. There was no evidence that additional funds were loaned to the debtor by the bank. In addition, the court determined that the bank’s lowering of the interest rate on the obligation did not cause the creditor to lose priority. 

Trusts and Estate Planning

Trusts are a popular tool in estate planning for various reasons.  One reason is that a trust can help consolidate farming and ranching interests and aid in the succession planning process.  The benefit of consolidating farm and ranch property in trust was the issue of a recent Wyoming case.  In re Redland Family Trust, 2019 WY 17 (2019), involved a family that has been involved in contentious litigation over a family trust. The case had been before the Wyoming Supreme Court on multiple occasions. The trust was created in 1989 and amended in 1995. The amendment provided for the appointment of a successor trustee; always required the service of two trustees; created a marital trust for the survivor of the settlors; and revised the buyout provision. The grantors and their five children made contributions to the trust. Upon the death of one of the grantors in 2007 one of the children was appointed as co-trustee.  Ligation arose when the surviving grantor’s property was not conveyed to the trust and then again involving removal of the trustees, and an appointed trustee moved to have the trust terminated due to the administrative difficulties to administer, family dysfunction, and because the trust no longer served its purpose. The defendants, (including the co-trustee that resigned) asserted that termination was moot and moved to have the new co-trustee removed.

The trial court did not remove the co-trustee and found that the trust was still valid. The trial court found that the co-trustee did not violate any fiduciary duties and that the defendants failed to show gross and willful misconduct to justify her removal. Further the trial court found that the co-trustee’s claims that the trust was invalid should have been raised in the original trust challenge. The trial court determined that the primary reason for the trust (to keep the lands and leases together for the Redland family) had not been frustrated and that the trust remained administratively functional and was not "unlawful, contrary to public policy, or impossible.

On appeal, the Wyoming Supreme Court affirmed. The Court determined that the trust still had a purpose - to keep the ranch holdings together to conduct business. Even though the other purpose of minimizing tax consequences had failed, consolidation of ranch holdings remained a legitimate purpose. The Court also determined that the co-trustee did not violate her fiduciary duties, her duties of impartiality or loyalty, and that her actions did not amount to gross and willful misconduct. In addition, the Court found that the duty of impartiality did not require the trustee to treat all beneficiaries fairly, but simply to act in the best interest of the beneficiaries and equally defend the intentions of the settlors. While the Court could find no precedent with respect to the duty of loyalty the Court held that merely seeking termination of the trust was not a breach of loyalty. In addition, the Court determined that hostility between parties did not warrant removal. 

Rights of Grazing Permittees

In the U.S. West, the ability to graze on federally owned land is essential to economic success.  An understanding of those rights is essential, and many legal battles in the West involve associated rights and responsibilities on federal land.  One of those issues involves the erection of improvements.  In Johnson v. Almida Land & Cattle Co., LLC, 2019 Ariz. App. Unpub. LEXIS 140 (Ariz. App. Ct. Jan. 31, 2019), the defendant owned a grazing allotment and was permitted to graze cattle on the allotted Forest Service land in Arizona. Consistent with the grazing permit, the defendant erected an electric fence on the allotment. In June 2011, the plaintiff collided with the fence while riding an off-road motorcycle, when he turned off a Forest Service road onto an unmarked, unimproved “two-track route” which the fence crossed. The plaintiff brought sued for negligence and the defendant moved for summary judgment on the basis that it owed no duty of care to the plaintiff. The trial court granted the motion, agreeing that there was no duty of care under the Restatement (Second) of Torts.

On appeal, the appellate court determined that the issue was whether a federal permittee owes a duty of care to the public with respect to construction of improvements on the land. Determination of that issue, the appellate court reasoned, was dependent on state law. On that point, the appellate court found that a criminal statute will establish a tort duty if the statute is designed to protect the class of persons in which the plaintiff is included, against the risk of the type of harm which has in fact occurred as a result of its violation, regardless of whether the statute mentions civil liability. The relevant AZ criminal statute held that a person commits a misdemeanor of public nuisance if that person knowingly and unlawfully obstructs a “public highway,” “public thoroughfare,” “roadway” or “highway.” The appellate court held that this public nuisance statute prohibiting the obstruction of certain types of pathways, also created a tort duty in those who erect improvements that impact those paths. Based on this interpretation, the court held that AZ law establishes a public policy giving rise to a tort duty with respect to the obstruction of certain types of public pathways. Consequently, a permittee on federal land owes a duty of care to the public when it erects an improvement across a publicly accessible route. However, the appellate court held that the facts were insufficient to determine, as a matter of law, whether the route at issue qualified as a “public highway,” “public thoroughfare,” “roadway” or “highway.” Consequently, the appellate court reversed on the duty of care issue and remanded to determine if the route fell within the scope of the relevant statutes. 

Conclusion

Agricultural law is a “goldmine” of issues that landowners, producers and their legal and tax counsel must stay on top of.  It’s a dynamic field.  In a few more weeks, I will dig back into the caselaw for additional key recent developments.

March 29, 2019 in Bankruptcy, Business Planning, Estate Planning, Regulatory Law | Permalink | Comments (0)

Thursday, March 21, 2019

Packers and Stockyards Act Provisions For Unpaid Cash Sellers of Livestock

Overview

The Packers and Stockyards Act (PSA) of 1921 was enacted with the purpose of ensuring fair competition in and trade practices involving livestock marketing, meat and poultry.  7 U.S.C. §§181-229.  See also Armour & Company v. United States, 402 F.2d 712 (7th Cir. 1968).  The scope of the PSA is quite broad, vesting in the U.S. Secretary of Agriculture (Secretary) wide discretion to investigate and regulate all activities connected with livestock marketing.  See, e.g., Rice v. Wilcox, 630 F.2d 586 (8th Cir. 1980)

What happens when a livestock packer, market agency or a livestock dealer fails to pay for livestock that it buys from a livestock seller?  The “prompt payment rule and the statutory trust of the PSA – that’s the topic of today’s post.

Rules Governing Payment For Livestock

Prompt payment rule.  The PSA provides for failure to make prompt and full payment for livestock.  Generally, to not be deemed to be engaged in an “unfair practice” under the PSA, a packer must make full payment of the livestock’s purchase price “before the close of the next business day following the purchase of livestock and transfer of possession thereof.”  7 U.S.C. §§228b(a) and (c).  A packer subject to the prompt payment rule is defined as “any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) of manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.”  7 U.S.C. §191.  When livestock is purchased for slaughter, payment must be made to the seller or the seller’s representative at the point of transfer or the funds must be wired to the seller’s account by the close of the next business day.  Id.  If the sale is based on carcass weight, or is a grade/yield sale, the same rule applies once the purchase amount has been determined.  Id.  If the seller (or the seller’s agent) is not present to receive payment at the point of sale, the packer is to either wire the funds to the seller and put a check in the mail for the full amount by the close of the next business day.  Id. 

The prompt payment requirement can be waived by written agreement that is entered into before the purchase or sale of livestock.  7 U.S.C. §228(b)(b)The regulations provide a format for the waiver.  9 C.F.R. §201.200(a)The agreement must be disclosed in the business records of the buyer and the seller, and on the accounts or other documents that the buyer issues relating to the transaction.  7 U.S.C. §228b(b).  But, if the prompt payment requirement is waived, the seller will lose any interest the seller has in the statutory trust (discussed below).  7 U.S.C. §196(c)

The prompt payment rule also applies to “market agencies” and “dealers” in addition to packers (as defined above).  A “market agency” is any person “engaged in the business of (1) buying or selling in commerce livestock on a commission basis or (2) furnishing stockyard services.” 7 U.S.C. §201(c).  Simply denoting “commission” on an invoice does not, by itself, indicate that the sale was on a commission basis.  It’s the nature of the business relationship of the parties and the surrounding facts and circumstances that are determinative.  See, e.g., Ferguson v. United States Department of Agriculture, 911 F.2d 1273 (8th Cir. 1990).  A “dealer” is “any person, not a market agency, engaged in the business of buying or selling in commerce livestock, either on his own account or as the employee or agent of the vendor or purchaser.”  7 U.S.C. §201(d).  In Kelly v. United States, 202 F.2d 838 (10th Cir. 1953), the court said that a person can be a “dealer” even if the buying and selling of livestock is not the person’s only business. 

A violation of the prompt payment rule constitutes an “unfair practice” under the PSA.  7 U.S.C. §228b(c).  The same is true for the issuance of an insufficient funds check and the failure to pay when due.  7 U.S.C. §213(a); 7 U.S.C. §228(b). 

The inability to make prompt payment is sometimes tied to the financial condition of the buyer. Consequently, all market agencies are prohibited from operating while insolvent – when current liabilities exceed current assets.  7 U.S.C. §204.  See also United States v. Ocala Livestock Market, Inc., 861 F. Supp. 2d 1328 (M.D. Fla. 2012). 

Statutory Trust.  For packers with average annual purchases of livestock exceeding $500,000, the PSA establishes a statutory trust for the benefit of unpaid cash sellers.  A “cash sale” is any sale where the seller does not expressly extend credit to the packer.  7 U.S.C. §196(a); Kunkel v. Sprague National Bank, 128 F.3d 636 (8th Cir. 1997)The provision extends to “all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom….”  7 U.S.C. §196(b).  The funds must be held in the trust for the benefit of al unpaid cash sellers of livestock until full payment has been received by the unpaid seller.  Id. 

If a packer files bankruptcy, assets contained in the statutory trust are not part of the bankruptcy estate.  11 U.S.C. §541(d).  This means that the unpaid cash sellers of livestock do not have to compete with the bankrupt debtor’s secured creditors for the assets contained in the trust.  See, e.g., Rogers and King, Collier Farm Bankruptcy Guide §105[1].  Claims for payment from the statutory trust will defeat a properly perfected Uniform Commercial Code lien.  See, e.g., In re Gotham Provision Company, 669 F.2d 1000 (5th Cir. 1982).  Likewise, a bank creditor of a packer is not able to setoff funds held in the statutory trust.  See, e.g., In re Jack-Rich, Inc., 176 B.R. 476 (Bankr. C.D. Ill. 1994).  Also, payment from a statutory trust to livestock sellers are not recoverable as a preference item in bankruptcy.  But, what constitutes cash collateral can present issues. 

An unpaid cash seller can make a claim against trust assets by providing notice to the Secretary within 30 days of the final date for making prompt payment under 7 U.S.C. §228(b) or within 15 business days of being notified that the seller’s check has been dishonored, whichever is later.  7 U.S.C. §196(b); see also 9 C.F.R. §203.15.

The statutory trust requirement does not apply to livestock purchases by market agencies and dealers.  However, payments that a livestock buyer makes to a market agency for sales on commission are considered to be trust funds that must be deposited into a custodial account.  9 C.F.R.§201.42(a), (b).  In other words, a market agency or a dealer must maintain a custodial account for trust funds.    By close of the next business day after an auction, market agencies must deposit into the custodial account:  (1) all proceeds collected from the auction, and (2) an amount equal to the proceeds receivable from the livestock sale that are due from the market agency; any owner, employee, or officer of the market agency; and any buyer to whom the market agency has extended credit. 7 U.S.C. §201.42(c)-(d); 9 C.F.R. §201.42(c)In addition, a market agency must deposit an amount equal to all of the remaining proceeds receivable into the custodial account within seven days of the auction, even if some of the proceeds remain uncollected.  Id.  Funds in the custodial account can only be withdrawn to remit the net proceeds due a seller, to pay lawful charges which the market agency is required to pay, and to obtain sums due the market agency as compensation for its services.  9 C.F.R. §201.42(d).  A market agency must transmit or deliver the net proceeds received from the sale to the seller by the close of business on the day after the sale.  7 U.S.C. §228b(a); 9 C.F.R. §201.43(a). 

To make a statutory trust claim, written notice must be given to the buyer and the Grain Inspection Packers and Stockyards Administration (GIPSA).    The livestock not paid for must be identified along with the date of delivery.  The applicable “look-back” period is 30 days before receipt by the buyer and the Secretary. 

Note:  Effective November 29, 2018, GIPSA is no longer a standalone agency within the United States Department of Agriculture (USDA), but is contained within the USDA’s Agricultural Marketing Service (AMS).  The USDA final rule detailing the reorganization is found at 83 FR 61309 (Nov. 29, 2018).   

Remedies

Reparation.  A livestock seller that has sustained a PSA “injury” at the hands of a market agency or a dealer can sue in federal district court “for the full amount of damages sustained in consequence of such violation.”  7 U.S.C. §209(a), (b).  Another option for a disaffected livestock seller is to begin a reparation proceeding for money damages.  7 U.S.C. §§209(b); 210.  A filing for a reparation proceeding must be made within 90 days after the cause of action accrues.  7 U.S.C. §210(a).  See also 9 C.F.R. §§202.101-.123.  The filing is made with the Secretary at the AMS/GIPSA Regional Office.  The complaint must state the cause of the action; the date of the transaction; amount of damages; method of computation; place where the transaction occurred; and the name of the parties.  No particular Form is needed to file the complaint, however the P&SP Form 5000 is recommended. The Form is available here: https://www.gipsa.usda.gov/psp/forms-psp/PSP5000.pdf 

Once the complaint is processed and investigated, AMS/GIPSA will serve the complaint on the defendant.  The defendant will then have 20 days upon receipt to file an answer to the complaint.  Once an answer is received, or the time for responding has expired, the complaint is filed with a GIPS hearing clerk.  A hearing will be scheduled will be in writing unless an oral hearing is requested and claimed damages exceed $10,000.  An oral hearing can also occur if necessary to establish the facts and circumstances that gave rise to the controversy.  If AMS/GIPSA determines that a hearing should be in writing, each party will be given notice and 20 days to file objections.  Written hearings allow for additional evidence to be given, and have additional procedures that must be followed.   

If the Secretary determines that the livestock seller is entitled to damages, the Secretary will order the defendant “to pay to the complainant the sum to which he is entitled on or before a day named.”  7 U.S.C. §210(b).  AMS/GIPSA cannot enforce payment of any award, but the order can be enforced by the applicable federal district court (or any state court having general jurisdiction of the parties) upon an enforcement action being filed with the court within one year of the date of the order.  The order is deemed to be prima facie evidence of the facts stated in the order, and a prevailing livestock seller is entitled to reasonable attorney fees.  Id. 

A complaint can be withdrawn at any time to terminate the reparation unless there is a counterclaim. 

Injunction.  7 U.S.C. §228a authorizes a statutory injunction and allows the United States to apply for a temporary injunction or restraining order when it has reason to believe that any person governed by the PSA has “(a) failed to pay or is unable to pay for livestock, meats, meat food products, or livestock products in unmanufactured form, … or has failed to remit to the person entitled thereto the net proceeds from the sale of any such commodity sold on a commission basis; or (b) has operated while insolvent, or otherwise in violation of [the PSA] in a manner which may reasonably be expected to cause irreparable damage to another person; or (c) does not have the required bond; and that it would be in the public interest to enjoin such person from operating subject to this chapter or enjoin him from operating subject to this chapter except under such conditions as would protect vendors or consignors of such commodities or other affected persons.”  When the United States makes such a “proper showing,” the court “shall…issue a temporary injunction or restraining order.”  Id. 

Conclusion

The PSA is a major piece of legislation significantly regulating livestock sales involving covered entities.  It provides a level of protection for livestock sellers in terms of ensuring payment.  In addition, it is a good practice for lenders that finance PSA-covered entities to ensure that these entities promptly pay for all livestock purchased. 

March 21, 2019 in Regulatory Law | Permalink | Comments (0)

Tuesday, March 19, 2019

Packers and Stockyards Act – Basic Provisions

Overview

This week’s two posts will be devoted to the Packers and Stockyards Act (PSA). 7 U.S.C. §181 et seq.  Recent news of a sale barn bankruptcy in Kansas has brought renewed attention to how the PSA works and its various provisions.  In today’s post, I will detail a bit of the history of the PSA and several of the basic provisions of the law.  In Thursday’s post, I will deal specifically with the PSA trust that is created to protect unpaid cash sellers of livestock when a buyer files bankruptcy – the problem facing some Kansas cattlemen at the present time.

The PSA – it’s history and basic provisions, that’s the topic of today’s post.

History of the PSA

The PSA is enforced by the USDA’s Packers and Stockyards Administration which regulates the livestock and poultry marketing system in the U.S.  The stated purpose of the PSA is to assure the free flow of livestock from livestock farms and ranches to the marketplace.  See, e.g., Stafford v. Wallace, 258 U.S. 495 (1922). The PSA regulates both packers and stockyards.

The genesis of the PSA dates back to 1888.  That’s when the U.S. Senate authorized an investigation of the buying and selling of livestock to determine if anti-competitive practices were present.  The investigation revealed that major meatpackers were engaging in unfair, discriminatory and anti-competitive practices by means of price fixing, agreements not to compete, refusals to deal and similar arrangements.  The Senate report contributed to the political support for the Sherman Act of 1890. 

In 1902, an injunction was sought against the major meatpackers alleging antitrust violations.  The injunction was issued in 1903 and the Supreme Court sustained it in 1905. Swift & Company v. United States, 196 U.S. 375 (1905). The injunction, however, was not successful in correcting the situations deemed anti-competitive. The same defendants or their successors were indicted and tried for alleged violations of the antitrust laws but were acquitted after trial in 1912.  The dominance and anti-competitive activities of the packers continued, and in 1917, President Wilson directed the Federal Trade Commission (FTC) to investigate the packing industry.  The FTC report documented widespread anti-competitive practices involving operations of stockyards, actions of commission persons, operation of weighing facilities, disposal of dead animals and control of packing plants.

During congressional debate of the PSA, the major packers signed a consent decree in an attempt to ward off the new legislation.  The consent decree was entered into on February 27, 1920, and it enjoined the “Big Five” meatpackers (Swift & Co., Armour & Co., Cudahy Packing Co., Wilson & Co., and Morris & Co.) from certain activities.  The Big Five were prohibited from maintaining or entering into any contract, combination or conspiracy, in restraint of trade or commerce, or monopolizing or attempting to monopolize trade or commerce.  The consent decree also prohibited the Big Five from engaging in any illegal trade practice as well as owning an interest in any public stockyard company, any stockyard terminal railroad or any stockyard market newspaper or journal.  The injunction also prohibited the Big Five from having an interest in the business of manufacturing, selling or transporting, distributing or otherwise dealing in any of numerous food products, mainly fish, vegetables, fruits, and groceries and many other commodities not related to the meatpacking industry.  Similarly, the injunction prohibited the Big Five from using or permitting others to use their distribution systems or facilities for the purchase, sale, handling, transporting or dealing in any of the enumerated articles or commodities.  The injunction also prevented the owning or operating of any retail meat markets except in-plant sales to accommodate employees.  Because the Big Five controlled all the warehousing in their exercise of monopoly power, the injunction prevented them from having an interest in any public cold storage warehouse or engaging in the business of selling or dealing in fresh milk or cream.

Even though the Attorney General of the United States personally appeared before the House Committee on Agriculture and recommended against the proposed legislation on the ground that the consent decree would eliminate the evils in the packing industry and make legislation unnecessary, President Harding signed the PSA into law on April 15, 1921.  Consequently, some of the “Big Five” filed suit seeking to have the consent decree either vacated or declared void.  However, in 1928, the United States Supreme Court upheld the consent decree.  Swift & Co. v. United States, 276 U.S. 311 (1928). Similarly, the Supreme Court turned down requests to modify the decree in 1932 (Swift & Co. v. United States, 286 U.S. 106 (1932)) and 1961. Swift & Co. v. United States, 367 U.S. 909 (1961).  The decree, however, was terminated on November 23, 1981. United States v. Swift & Co., 1982-1 Trade Cas. (CCH) ¶64,464 (N.D. Ill. 1981).

While the PSA was “the most far-reaching measure and extend[ed] further than any previous law into the regulation of private business with few exceptions,” (61 Cong. Rec. 1872 (1921) and the powers given to the Secretary of Agriculture were more “wide-ranging” than the powers granted to the FTC, the Act was upheld as constitutional in several court cases from 1922 to 1934.  Unquestionably, the PSA extends well beyond the scope of other antitrust law.

Selected Provisions of the Act

Registration Requirement.  The PSA requires all marketing agencies that handle livestock to register with the USDA which has the authority to suspend registration for violations of the Act for insolvency. 7 U.S.C. Sec. 181 et seq.

Bonding. Packer bonding is required except for those with average annual purchases of $500,000 or less.  Thus, there is a danger posed to persons or entities selling livestock to relatively small buyers.  Selling to a local locker does not provide the protection that the PSA affords had the sale been to a packer purchasing at least $500,000 worth of livestock per year.

False Weighing.  False weighing of livestock is also prohibited.  False weighing of livestock had been a serious longstanding problem.  “Back balancing” had been a relatively common practice (failure to empty the scales to show a balanced condition).  False weighing is viewed as a serious offense and the regulations impose several detailed requirements to discourage false weighing. See 9 C.F.R. §§ 201.49-201.99.  For example, whenever livestock is weighed for the purpose of sale, a scale ticket must be issued which must be serially numbered and used in sequential order.  9 C.F.R. §201.49(a)The scale tickets must be retained as part of the market agency's or dealer's business records to substantiate each transaction, and must include: 1) the name and location of the weighing; 2) the date of the weighing; 3) the name of the buyer and seller or consigned, or a readily identifiable designation thereof; 4) the number of livestock; 5) the kind of livestock; 6) the actual weight of each draft of livestock; and 7) the identity of the person who weighed the livestock, or their signature if required by State law.  9 C.F.R. §201.49(b).

Gratuities. The Packers and Stockyards Act also prohibits the practice of a stockyard owner or market agency giving gratuities to truckers, consignors or shippers.  Providing free trucking to consignors as an inducement to consign livestock to a particular market is an unfair practice and a willful violation of the PSA that discriminates against those consignors not given free trucking. The practice also constitutes an unfair and unjust practice against competing markets, forcing them to give free trucking in order to remain in business.

Coordinated Buying.  The “turn system” of selling livestock has been held to violate the PSA. Berigan v. United States, 257 F.2d 852 (8th Cir. 1958).  Under the “turn system” of selling livestock, livestock dealers engage in the practice of flipping coins to establish the “order” or “turn” in which they would look at, bid on and have the opportunity to buy stocker and feeder cattle consigned for sale to a market agency.  This method of selling livestock limits the number of buyers or prospective buyers which increases the value of the position or turn of those not eliminated with the effect of restricting competition and depressing the market.

Bribery.  The PSA also prohibits the bribery of weighmasters.  Likewise, bribing employees of a market agency by a dealer to obtain favored treatment in sale of livestock has been held to violate the PSA.   See, e.g., In re McNulty, 13 Agric. Dec. 345 (1954).  Other violations of the PSA include market agencies purchasing animals from consignments for resale, price discounts being offered to some purchasers of meat products, and the use of “bait and switch” tactics in selling meat.

Recordkeeping.  The PSA requires that books and records be kept.  Penalties for failure to do so include a $5,000 fine or three years in prison or both.  Private actions may be brought for “reparations” under the Act by filing a complaint with the USDA within 90 days after the cause of action accrues.  USDA issues the order requiring payment.

Other Prohibited Practices.  The Act prohibits any “unfair, unjustly discriminatory, or deceptive practice or device7 U.S.C. §192(a).  But, in Kinkaid v. John Morrell & Co., 321 F. Supp. 2d 1090 (N.D. Iowa 2004), the court held that hog contracts containing a deduction charge for hogs dying in transit was not an unfair or deceptive practice and did not constitute an unauthorized sale of insurance under state (Iowa) law because the primary purpose of contracts was the sale of hogs.

Enforcement.  Enforcement of the PSA is either by a civil action, initiated by the person aggrieved by the violation of the PSA, or by an action taken by the U.S. Attorney upon request of the Secretary of Agriculture.  Jurisdiction is in the federal district court.

Conclusion

In part two on Thursday, I will dig into the PSA trust provision and the protection it provides for unpaid cash sellers of livestock.  That’s a provision that is of particular importance when a livestock buyer files bankruptcy after buying livestock but before making payment for them.  I will also look at some PSA market competition issues.  Stay tuned. 

March 19, 2019 in Regulatory Law | Permalink | Comments (0)

Monday, February 11, 2019

Is There A Common-Law Right To Hunt (and Fish) Your Own Land?

Overview

The Founders understood that governments can often be the biggest obstacle to individual, inalienable rights – those rights that cannot be revoked by some outside (governmental) force.  While a representative form of government can be the best protector of individual rights, it can become the “tyranny of the majority” as noted by John Adams and Alexis De Tocqueville.

The matter of inalienable rights is important to farmers and ranchers.  Land ownership and the rights associated with land ownership is of primary importance to agricultural businesses and families.  One of those rights involves the right to hunt (and fish) the property that an individual owns. 

That’s the topic of today’s post – an individual’s rights to hunt (and fish) their own property.

State Regulation of Hunting Rights

All states have an elaborate set of statutes and regulations governing the hunting of wildlife in that particular state.  The rules govern hunting on state-owned public land as well as privately owned land.  In addition, the hunting rules vary depending on the type of game – big game; small game; fur-bearing or fowl.  The state rules also depend on whether the hunter is a resident of the particular state or a nonresident.  The rules tend to be less restrictive for residents, particularly those in certain age ranges, than they are for nonresidents.  The fees for licenses and/or permits are also much lower for residents than nonresidents, with typical exceptions for full-time students and service members.

As for non-resident landowners, the state rules vary from state-to-state.  Kansas, for example, requires a nonresident “hunt-on-your-own-land” deer permit.  That permit is available to either a resident or nonresident who actively farms a tract of 80-acres or more in the state.  The property must be owned in fee simple.  The name on the deed must be denoted in a particular manner.  

The Iowa approach is different.  Hunting rights in Iowa don’t follow ownership.  A nonresident landowner has no inalienable right to hunt their own property – property for which they pay taxes to the state of Iowa.  The portion of the Iowa hunting laws defining “resident” and “owner” were the subject of a recent case.

Iowa Case

Iowa hunting law allows a resident landowner to obtain annually up to two deer hunting licenses - one antlered or any sex deer hunting license and one antlerless deer free of charge. Iowa Code §483A.  A resident landowner may also buy two antlerless deer hunting licenses. “Owner” is defined as the owner of a farm unit who is a resident of Iowa. Iowa Code §483A.24(2)(a)(3).   A “resident” is defined as including a person with a principle or primary residence or domicile in Iowa, a full-time student, a non-resident under age 18 who has a parent that is an Iowa resident or a member of the military that claims Iowa residency either by filing Iowa taxes or being stationed in Iowa.  Iowa Code  §483A.1A(10).  Nonresident landowners must apply for antlered licensing. The state allots 6,000 antlered or any sex deer hunting licenses to nonresidents via a lottery system for a fee.  If a nonresident landowner does not receive an antlered license through the lottery system, "the landowner shall be given preference for one of the antlerless deer only nonresident deer hunting licenses."

The plaintiff owned 650 acres in southcentral Iowa, but was not domiciled in Iowa.  Over the prior six-year period, the plaintiff received nonresident antlered deer hunting licenses through the lottery four times. The other two years the plaintiff obtained a nonresident antlerless deer hunting license. The plaintiff has been able to hunt every year on his property, but as a nonresident landowner and by paying the higher fees associated with being a “nonresident.” 

In 2016, the plaintiff, in Carter v. Iowa Department of Natural Resources, No. 18-0087, 2019 Iowa App. LEXIS 119 (Iowa Ct. App. Feb. 6, 2019), filed a declaratory action against the state requesting a ruling establishing him as an "owner" under for purposes of Iowa deer hunting laws.  He claimed that not treating him as an “owner” violated his inalienable rights and his equal protection rights under the Iowa Constitution. The state did not respond within 60 days and the action was treated as having been denied.  The plaintiff sought judicial review.

The trial court rules for the state.  On further review, the appellate court affirmed.  While the plaintiff claimed that he had an inalienable right to hunt the property that he owned and paid taxes on to the state of Iowa, the appellate court held that the state’s differential treatment between residents and non-residents for obtaining hunting licenses for antlered deer was reasonable, not arbitrary, and constituted an appropriate use of the state’s police power.  The appellate court also determined that the different treatment of residents and non-residents served a legitimate governmental interest in conserving and protecting wildlife that was rationally related to that legitimate governmental interest.  The court, citing Democko v. Iowa Department of Natural Resources, 840 N.W.2d 281 (Iowa 2013), noted that 2013 decision held that landownership in Iowa does not give the landowner the right to hunt the land because the landowner has no interest in or title to wildlife on the owner’s property.  That wildlife, the Supreme Court had determined in 2013, is owned by the state of Iowa.  Thus, there is no common law right to hunt based on ownership.  The legislature, as the Iowa Supreme Court noted in 2013, established extensive hunting laws (and the subsequent underlying regulations) that had eliminated that right in a manner consistent with the legitimate state interest of wildlife preservation.

What About Private Farm Ponds?

As noted, the Iowa Supreme Court, in 2013, removed from the “bundle of sticks” of private property ownership, the common law right to hunt wildlife on one’s own property.  But what about fish in a pond on privately owned property?  Does the landowner have a right to fish their own pond without going through the state?  The answer may not be as obvious as it seems it should be.  It’s also an issue that is currently being debated in Iowa.  Current Iowa law says that the Iowa Natural Resource Commission (Commission) can’t stock private water unless the owner agrees that the private water is opened to the public for fishing.  Iowa Code §481A.78.  In other words, if the state stocks a private pond, the landowner must make the pond available for public fishing.  However, the law allows the Commission to investigate a private pond to determine if the “living conditions” of the fish in the private pond are suitable and then provide breeding stock on the owner’s request.  In that instance, the private pond need not be opened for public fishing.  Id.

However, this fishing provision of Iowa law has become contentious.  Legislation is presently being worked up in the Iowa legislature that would strike that law entirely and replace it with a new provision specifying that the Commission “shall not stock a private pond or lake.”  SF 203.  The new legislation would allow the Commission to stock a creek or stream flowing through private property.  Id. The legislation also specifies that a fishing license is not required to fish on an entirely land-locked private pond so long as it is not located on a natural stream channel or connected via surface water to waters of Iowa.  Id.

Conclusion

Apparently, there is no “resident” requirement in the law governing the fishing of private ponds in Iowa.  So, a nonresident can fish their own pond even though living out of state, but a nonresident has no common law right to hunt their own property in Iowa.  “Wildlife,” however, belong to the state of Iowa while they are present there.  That is, of course, unless a resident (or nonresident) collides with wildlife on an Iowa public roadway and incurs damage and/or injury in the collision.  Hmmm….  That might be the topic of a future post.        

Do you know the rules in your state?  

February 11, 2019 in Real Property, Regulatory Law | Permalink | Comments (0)

Thursday, January 10, 2019

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

Overview

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

Number 3 – The 2018 Farm Bill

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Whew!  What a trek through the WOTUS landscape!

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

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

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

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

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

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

Conclusion

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

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

Tuesday, January 8, 2019

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

Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

Number 5 - Discharges of “Pollutants” To Groundwater

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

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

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

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

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

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

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

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

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

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

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

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

Number 4 - Air Emission Reporting for Livestock Operations

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

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

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

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

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

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

Conclusion

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

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

Wednesday, January 2, 2019

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

Overview

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

Number 10 - Management Activities and the Passive Loss Rules

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

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

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

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

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

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

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

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

Number 9 - Court Orders Chlorpyrifos Registrations Canceled

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

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

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

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

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

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

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

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

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

Conclusion

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

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

Monday, December 31, 2018

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

Overview

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

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

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

The “Almost Top Ten” - No Particular Order

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

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

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

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

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

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

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

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

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

Conclusion

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

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