A Look at Key 2017 Developments in Agricultural Law & Taxation

December 29, 2017
Kristine A. Tidgren

As the year concludes, we’re taking some time to review the most significant happenings in agricultural law and taxation in 2017. Some closed chapters on drawn-out litigation or administrative action. Others signal the beginning of much more activity to come. In any event, 2017 did not disappoint in terms of lots to discuss. We review these highlights below, in no particular order. And we’ll continue to keep you posted as the calendar rolls ahead to 2018. Happy new year!

Clean Water Rule Rescission Initiated

Since 2015, the Clean Water Rule or WOTUS has been the subject of much debate. The Rule—written by the Environmental Protection Agency and the U.S. Department of the Army—newly defined which “waters of the United States” are subject to Clean Water Act jurisdiction.  It went into effect August 28, 2015, but has been stayed nationwide since October of 2015.

On February 28, 2017, President Trump directed the agencies to prepare for public notice and comment a proposed rule to rescind or revise the Clean Water Rule. The Order said that officials should consider incorporating into any new rulemaking the definition of “navigable waters” suggested by Justice Scalia in Rapanos v. United States 547 U.S. 715 (2006): “only those wetlands with a continuous surface connection to adjacent waters covered by the Clean Water Act are ‘waters of the United States.’”

On June 27, 2017, the agencies took the first step of a two-step process to rescind and replace the Rule. They formally submitted a proposed rule to rescind the 2015 Rule and recodify (on an interim basis) the same regulatory text that existed prior to the 2015 rule. The proposed rule was published in the Federal Register on July 27, 2017. The public comment period closed on September 27, 2017.  In the next step, the agencies have stated that they will propose a new definition for “waters of the United States" “taking into consideration the principles that Justice Scalia outlined in the Rapanos plurality opinion.”

On November 16, 2017, the agencies proposed to amend the effective date of the 2015 Rule to two years after the November proposed rule was finalized and published. This amendment, the agencies stated, will give them time to reconsider the definition of “waters of the United States.”

In the meantime, the United States Supreme Court has agreed to hear a case which will determine whether the Sixth Circuit properly determined that it had jurisdiction to hear the merits of the many legal challenges to the Clean Water Rule. The Sixth Circuit determined on February 22, 2016, that 33 U.S.C. § 1369(b)(1) gives courts of appeals (and not district courts) exclusive original jurisdiction over challenges to the Clean Water Rule. In re EPA & Dep't of Def. Final Rule, 817 F.3d 261 (6th Cir. 2016). The National Association of Manufacturers asked the United States Supreme Court to review this decision. On January 13, 2017, the U.S. Supreme Court granted the request. Oral arguments concluded in October, and a decision should issue next year.

For more information, click here.

Des Moines Water Works Case Dismissed

On March 17, 2017, two years and one day after the Board of Water Works Trustees for the City of Des Moines (DMWW) filed its controversial lawsuit against the drainage districts in three northwest Iowa counties, a federal court dismissed the action in its entirety. The merits of the case were never considered. The court dismissed the lawsuit after finding that—even if DMWW was able to prove an injury—the drainage districts would have no ability to redress (or remedy) that injury. In other words, the drainage districts were not the proper defendants for this Clean Water Act lawsuit.

DMWW alleged that the concentration of nitrate in the Raccoon River, which is a primary source for DMWW’s raw water supply, had steadily increased since the 1970s. The lawsuit alleged that the nitrate removal system cost DMWW up to $7,000 per day to operate. The complaint set forth nine causes of action. The primary claim was that discharges from drainage districts are “point sources” of nitrate pollution. As such, DMWW alleged that the drainage districts must comply with the federal CWA and the National Pollutant Discharge Elimination System (NPDES) permit program, which is administered by the Iowa Department of Natural Resources. The complaint asked the federal court to declare that the drainage districts had violated federal and state law and to enjoin them from all discharges of nitrate not authorized by an NPDES or state operating permit. DMWW sought civil penalties for each continuing day of violation.

The case was watched around the country for its potential impact on agricultural drainage. In the end, the court did not address the agricultural storm water exemption or the definition of point source. Consequently, it is possible we will see this issue arise in future litigation.

For more information, click here.

Litigation under the “Significant Nexus" Test Continues

While 2017 ushered in a change in executive policy with respect to the Clean Water Rule, the question of which waters should be jurisdictional for purposes of the Clean Water Act is far from settled.  And the prosecution of cases under the rather murky “significant nexus” test set forth in Justice Kennedy’s Rapanos concurrence continues.  

United States v. Duarte. In 2016, a federal court found a California landowner liable for violating the Clean Water Act (CWA) because he tilled a 450-acre parcel of his land to plant wheat. On the eve of his scheduled August 2017, trial, he agreed to settle the case. At issue would have been (1) the scope of his CWA violations, (2) the appropriateness of the United States’ requests for restoration and mitigation, and (3) the amount of his civil penalty. The government was asking for a civil penalty of $2.8 million, plus tens of millions more worth of off-site mitigation.  

For more information, click here.

United States v. Robertson. In 2016, Mr. Robertson, a 77-year-old defendant, was sentenced to 18 months in prison and three years’ supervised release for the unauthorized discharge of pollutants into waters of the United States. His conviction stemmed from his creation of ponds on his Montana property. Mr. Robertson argued that U.S. v. Davis, 825 F.3d 1014 (9th Cir. 2016), modified how courts in the Ninth Circuit are to apply fractured decisions (like Rapanos) from the U.S. Supreme Court. He argued that Justice Kennedy’s significant nexus test was not the applicable CWA jurisdictional test in the Ninth Circuit. The case was heard by the Ninth Circuit in August of 2017. On November 27, 2017, the court affirmed Mr. Robertson’s conviction, ruling that Justice Kennedy’s opinion was properly applied as the controlling opinion from Rapanos.

The case is U.S. v. Robertson, No. 16-30178, 2017 U.S. App. LEXIS 23910 (9th Cir. Nov. 27, 2017).

Congress Passes Sweeping New Tax Legislation

On December 22, 2017, President Trump signed H.R.1 into law. This new law implements the most significant changes to our tax code in more than 30 years. The law temporarily lowers individual income tax rates and creates a new 20 percent deduction for “qualified business income.” These changes are in place through 2025. The law permanently lowers the corporate tax rate from 35 percent to 21 percent. It also allows 100 percent bonus depreciation for new or used qualified property placed into service for the next five years.

As a result of H.R.1, many agricultural producers will see lower tax liability, at least in the near term. But much of 2018 will be spent interpreting exactly what the law means and how it applies to individual situations.

For more information, click here.

Health Insurance Becomes Unaffordable for Many Farmers

In 2017, many Iowa farmers were notified that their individual health insurance coverage would not be renewed for 2018. The only option for these Iowans wishing to purchase a new individual healthcare plan was to purchase a plan from Medica through www.healthcare.gov. These plans for 2018 had to be purchased between November 1 and December 15, 2017.  For those with incomes at or below 400% of the federal poverty limit, the high price of the policies was offset by premium tax credits. For those with incomes above 400%, however, premiums for many were simply unaffordable.

A farm couple, aged 55, earning $67,000 a year faced insurance premiums of $32,700. A 63-year-old couple earning $67,000 per year, faced premiums of $39,000 per year. A 28-year-old couple with four-year-old twins earning $101,000 per year saw premiums of $27,000. And some reports were higher. As a result, many farmers explored the possibility of purchasing group health coverage. For those with employees, that was an option. For those without employees, it was not. This issue is not going away in 2018. And it has not just impacted Iowans.  We will be watching to see if Congress takes steps to attempt to remedy the health insurance premium crisis in the new year..

For more information, click here.

New Emissions Reporting Requirements Imposed on Many Animal Farms

On April 11, 2017, the United States Court of Appeals for the District of Columbia vacated an EPA final rule that had been in place for nine years. The rule—called the CERCLA/EPCRA Administrative Reporting Exemption for Air Releases of Hazardous Substances from Animal Waste at Farms—exempted most farms from CERCLA and EPCRA reporting requirements for air releases from animal waste. The court ruled that the EPA had exceeded its statutory authority in granting the exemptions.

The court’s order subjected approximately 44,000 new commercial animal farms to reporting requirements the EPA has characterized as costly and burdensome.  Initially the court delayed enforcement of its mandate through November 14, 2017, to allow EPA to write new guidance for these new reporting requirements. The EPA issued its interim guidance on October 25, 2017, and sought additional public input. On November 22, 2017, in response to a motion filed by EPA, the United States Court of Appeals for the District of Columbia issued an order further delaying implementation of the reporting requirements until January 22, 2018. This will allow EPA to receive further public comment and refine its guidance materials.

For more information, click here.

President Trump Signs Family Farmer Bankruptcy Clarification Act into Law

On October 26, 2017, President Trump signed the Family Farmer Bankruptcy Clarification Act of 2017, into law. This provision is intended to assist struggling farmers by providing them with more options for reorganizing through a Chapter 12 bankruptcy. Chapter 12 is the bankruptcy provision that was specially created in 1986 for "family farmers" or "family fishermen." Chapter 12 allows financially distressed farmers to propose and carry out a plan to repay all or part of their debts by making installment payments to creditors over a three to five-year period. Under such a plan unsecured debt, or debt not secured with collateral, can be discharged, meaning that it will not be repaid. 

The new law superseded Hall v. U.S., 132 S. Ct. 1882 (2012), a 5-4 U.S. Supreme Court decision which interpreted bankruptcy law to make it nearly impossible for farmers to discharge capital gains tax arising due to the sale of property after the filing of a Chapter 12 bankruptcy petition. In Hall, the Supreme Court declared that taxes incurred due to the sale of farm assets used in the debtor’s farming operation could be treated as unsecured claims only if the sale occurred in the tax year prior to the filing of the bankruptcy petition. This meant that many farmers could not reorganize their operations by selling assets to “right-size” the business after the bankruptcy action began. The tax liability could not be discharged, and there was insufficient liquidity to pay the tax. Often, selling assets before the filing was unworkable.

The new law, cosponsored by Senators Grassley and Franken, makes it clear that tax liability arising because a farmer sells farming assets after filing a Chapter 12 bankruptcy petition, but before discharge, will be dischargeable in the bankruptcy action. This law will make Chapter 12 a better tool for a number of debtors. Still, many are precluded from using Chapter 12 because the debt limit, although adjusted for inflation, has not kept pace with current asset values. It is currently set at $4,153,150. Some farmers just above the limit may be able to file a Chapter 12 by selling assets to reduce some debt before filing. 

For more information, click here.

Syngenta Settles with Farmers               

On September 26, 2017, Syngenta announced that it had agreed to settle claims brought against it by U.S. farmers on account of its allegedly premature marketing of Viptera and Duracade GMO corn. These claims include those in the Syngenta MIR 162 Corn Litigation, as well as those in the class action in Minnesota state court. The initial settlement agreement was reached in the middle of a multi-week trial occurring in Hennepin County District Court in Minnesota. This trial involved more than 20,000 Minnesota farmers seeking $400 million in damages. In June, a jury awarded Kansas farmers $217.7 million in damages against Syngenta. Syngenta was appealing the award, and additional trials were scheduled.

The details of the settlement have not been released, but news agencies have reported that Syngenta has agreed to pay $1.5 billion. Details, including the process for filing claims, should be announced in early 2018.

For more information, click here.

Tax Court Rules that Farm Couple's Rent from Its S Corporation Not Subject to SE Tax

On September 27, the U.S. Tax Court ruled that a Texas farm couple was not liable to pay self-employment tax on rents they received from the S corporation through which they conducted a poultry growing operation. The decision in Martin v. Commissioner, 149 T.C. 12 (Sept. 27, 2017), adopted the analysis of McNamara v. Commissioner, 236 F.3d 410 (8th Cir. 2000), and came 14 years after the IRS announced its non-acquiescence with McNamara.
 
The court adopted and summarized the Eight Circuit’s “test” as follows: Regardless of a taxpayer’s material participation, if the rental income is shown to be less than or equal to market value for rent, the income is presumed to be unrelated to any employment agreement. At that point, the burden of production shifts to the IRS to show a nexus between the rent and the taxpayer’s obligation to materially participate. Such a showing would render the lease and employment agreements part and parcel of a larger “arrangement.”  Without such a showing, no self-employment tax is due. Taxpayers should have a written lease specifically disclaiming material participation.

Agricultural taxpayers outside of the Eighth Circuit now have a court opinion upon which they can rely to exclude self-rental income from the reach of self-employment tax in certain circumstances.  

For more information, click here.

Dicamba Drift Impacts Many Farmers

2017 saw an explosion of dicamba drift issues. Although dicamba has been around for decades, its use was restricted. Because of its volatility or tendency to spread uncontrollably beyond its targeted area, dicamba was not approved for post-emergent use on soybeans and cotton. Because of the increasing resistance of many weeds to glyphosate (Roundup), however, manufacturers such as Monsanto, BASF, and DuPont have been working to reduce the volatility of dicamba, which is highly effective against difficult weeds. As part of their system, they developed genetically modified versions of soybeans and cotton that are dicamba tolerant. During the last year, EPA approved certain formulations of dicamba for use over the top of these dicamba resistant plants. These systems were marketed for use during the 2017 crop year.

The implementation was less than seamless. Thousands of acres of crops were damaged due to dicamba drift, and various parties are pointing fingers. In some cases, the manufacturers are asserting that the applicators have not followed the specific instructions given for the use of this chemical or that they are using unapproved formulations of dicamba. Applicators and their insurers allege that despite using reasonable care, dicamba drifted to neighboring fields or pastures, harming crops, fruit, and trees. Some scientists contend that dicamba is prone to vaporize or turn from a liquid to a gas during warm weather, even when the label instructions are carefully followed. The farmers suffering loss are left with no easy remedy. 

Multiple lawsuits have been filed and many more are sure to follow.  These include class actions, as well as individual lawsuits. Much like we have seen with the Syngenta litigation, these actions will likely drag on for years. The questions are complex and facts will continue to emerge. Further regulatory action will likely ensue. In late 2017, the Arkansas Plant Board voted to ban dicamba for use between April 16 and October 31 of next year. In October, the EPA and the manufacturers reached an agreement to implement significant label changes for 2018. We will continue to monitor this issue closely.

For more information, click here.

Court Says that Farmers Weren’t “Farmers” for Purposes of Conservation Easement Donation Deduction

The tax code allows an enhanced deduction for the donation of a qualified conservation easement. IRC § 170(b)(1)(E). This deduction is generally limited to 50% of the donor's “contribution base,” which is the taxpayer's adjusted gross income (computed without regard to any net operating loss carryback for the taxable year), less the value of other charitable contributions for the year. IRC § 170(b)(1)(G).

A special rule applies to “qualified farmers and ranchers.” These taxpayers may deduct the value of the donation up to 100% of their adjusted gross income, less the amount of all other charitable contributions. IRC § 170(b)(1)(E)(iv). The PATH Act made the enhanced conservation easement donation deduction permanent.

A recent tax court case held that the statute’s “narrow” definition of “qualified farmers” prevented two full-time farmers from taking a 100 percent deduction. Instead, they were limited to the 50 percent deduction applicable to other taxpayers.

The case was Rutkoske v. Comissioner, 149 T.C. 6 (August 7, 2017). Read more here.

GIPSA Withdraws Farmer Fair Practices Rules

In December of 2016, the Grain Inspection, Packers and Stockyards Administration (GIPSA), the USDA division tasked with interpreting the Packers and Stockyards Act of 1921, 7 U.S.C. 181 (the Act), unveiled an interim final rule and two proposed rules that had been in the works for many years. The interim final rule (§ 201.3(a), (b)) specified that conduct or action can sometimes violate the Act without a finding of harm or likely harm to competition. One of the proposed rules intended to regulate poultry grower ranking systems (§ 201.214) and another clarified the definition of Unfair Practices and Undue Preferences (§§ 201.210 and 201.211) under the Act.

The Rules were controversial from the outset and on April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule and seeking additional public comment. On October 18, 2017, GIPSA officially withdrew the Interim Final Rule and the Unfair Practices and Undue Preferences proposed ruled.  Although the poultry grower ranking systems proposed rule has not been withdrawn to date, it remains inactive.

For more information, click here.

In unrelated action, the USDA has also (for the third time) delayed implementation of a new regulation designed to include animal welfare restrictions in the organic program. These rules have now been delayed until May 14, 2018.

“Ag-Gag” Challenges Continue

In July of 2017, a federal court in Utah struck down a law designed to protect animal production facilities from unauthorized intrusion. The Utah law prohibited obtaining access to an animal production facility under false premises and making unauthorized audio or video recordings of these facilities. The Utah court ruled that the law violated the First Amendment because the false statements prohibited by the law did not cause harm to the animal production facilities. As such, the court ruled that these statements were protected by the First Amendment. The court specifically found that these false statements did not cause “trespass-type harm” of interfering with the ownership or possession of property. Thus, the court reasoned that the lies were protected by the First Amendment.  The court found that the government’s interest to protect these facilities was not sufficiently compelling to justify its intrusion on freedom of speech. The State of Utah did not appeal the district court’s ruling. As such, the Tenth Circuit Court of Appeals will not rule on this case. The case was Animal Legal Def. Fund v. Herbert, 2017 U.S. Dist. LEXIS 105331 (D. Utah July 7, 2017).

In September of 2017, the Tenth Circuit decided in another case that a Wyoming “data trespass law” implicated the First Amendment. The law established enhanced penalties for trespassing onto private land to collect research data, such as photographs, soil or water samples. The court noted that while trespassing does not enjoy First Amendment protection, the law targeted the “creation” of speech by imposing heightened penalties on those who collected natural resource-related data. The case was W. Watersheds Project v. Michael, 869 F.3d 1189, 2017 U.S. App. LEXIS 17279, 47 ELR 20110 (10th Cir. Wyo. Sept. 7, 2017).

On October 10, 2017, a number of animal rights groups filed a lawsuit in the United States District Court for the Southern District of Iowa against the Governor and Attorney General of Iowa, challenging the constitutionality of Iowa Code § 717A.3A, Iowa’s Agricultural Production Facility Fraud statute. The law prohibits persons from obtaining access to animal production facilities under false pretenses. It also prohibits making false statements to get a job with an animal production facility with the intent to commit unauthorized acts on that premises. In other words, the law prohibits lying and trespass. Groups bringing the lawsuit, however, argue that this law is a subterfuge for squelching constitutionally protected speech, in particular, speech related to undercover investigations at animal farms.

The state has filed a motion to dismiss. We will be following this litigation in 2018. For more information, click here.

Federal Court of Appeals Vacates Registration Requirement for Model Aircraft

On May 19, 2017, the District of Columbia vacated the portion of a 2015 FAA Rule requiring registration of model aircraft. In Taylor v, Huerta, 856 F.3d 1089 (D.C. Cir. 2017), the court ruled that the FAA had exceeded its authority in applying the registration requirement to hobby users operating under the Special Rule for Model Aircraft.

UAS users operating for commercial purposes must continue to register if their UAS weighs more than 0.55 pounds and less than 55 pounds. Those who fail to register are potentially subject to civil and criminal penalties, including up to three years' imprisonment.

For more information, click here.

 

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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