Annotations 03/2015

The defendant enacted a Master Zoning Plan (MZP) that is regulated and enforced via a series of ordinances.  At issue was an ordinance that limited one residence to a lot ("base tract"), but to build a second residence on a lot, the lot must be subdivided and an Improvement Location Permit is obtained.  The MZP contains a farm exemption which exempts farm houses and other farm structures from the one residence restriction when the lot is used for agricultural purposes as a primary means of livelihood.  The base tract was 59.2 acres when the plaintiff bought it in 1993 from a decedent's estate.  The deed required the plaintiff to continue to have the land enrolled in the Conservation Reserve Program (CRP).  In 1996, the plaintiff built a residence (a second residence on the tract) without obtaining an Improvement Location Permit and did not apply for subdivision approval.  Instead, the plaintiff argued that the tract was exempt from the zoning rules due to being used for agricultural purposes.  The defendant sought removal of the residence from the parcel and the trial court agreed, granting the defendant summary judgment.  On appeal, the court affirmed.  The court noted that the plaintiff purchased the property subject to a condition that it remain in the CRP.  The court upheld the trial court's finding that "land in a conservation reserve program can not, by definition, be farmed."  The appellate court also stated, "it cannot possibly be used for agricultural purposes unless and until the CRP contract expires.  As such, there is no way for the farm exemption to apply.  The court's opinion is completely silent that it is the position of the federal government that land enrolled in the CRP produces self-employment income that must be reported on a farmer's Schedule F as farm income where it is subject to self-employment tax.  That is the case for a retired person on social security, although CRP rents paid to such persons are statutorily not subject to self-employment tax.  Apparently, this significant point was not briefed and argued by the plaintiff's lawyer.  Kruse v. DeKalb County Plan Commission, No. 17A03-1406-PL-227, 2015 Ind. App. LEXIS 120 (Ind. Ct. App. Feb. 27, 2015).  


A group of farmers contracted to deliver cotton grown during the 2010 and 2011 crop years to the U.S. Cotton Growers Association (USCGA), a marketing pool that the appellant owned.  A dispute arose concerning performance under the contracts ultimately resulting in the farmers suing the appellant and the USCGA.  The farmers alleged breach of contract, fraud, violations of the state (TX) Deceptive Trade Practices Act, conversion, negligent misrepresentation, breach of fiduciary duty, conspiracy and civil fraud.  Each contract contained a provision stating that "any and all disputes arising between" the parties "shall be resolved...exclusively by binding arbitration pursuant to the arbitration rules of the American Cotton Shippers Association."  The appellant and the USCGA sought an order compelling arbitration, but the trial court held that the arbitration clause was unconscionable, unenforceable and void.  On appeal, the court reversed.  The appellate court noted that after the case had been briefed and submitted, the TX Supreme Court had decided Venture Cotton Coop v. Freeman, 435 S.W.3d 222 (Tex. 2014) in which the Court noted that an unconscionable or illegal contract provision could be severed if it does not constitute the essential purpose of the agreement.  The appellate court noted, based on the TX Supreme Court's analysis, that numerous factors had to be considered to determine unconscionablity, including whether the farmers knew of the ramifications of agreeing to arbitrate before signing the contracts.  Other factors to be considered are the commercial atmosphere in which the agreement was made, the available alternatives, and the ability of the farmers to bargain.  Accordingly, the court reversed the trial court's decision and remanded for further proceedings in light of the TX Supreme Court's 2014 opinion.  Ecom USA, Inc., et al. v. Clark, et al., No. 07-14-00240-CV, 2015 Tex. App. LEXIS 1817 (Tex. Ct. App. Feb. 25, 2015).


The taxpayer was a nonexempt ag co-op that bought, stored, marketed and sold grain.  The grain was purchased from the co-op's members (farmers) and was sold to grain processors.  The co-op, along with two other co-ops, formed an LLC.  The LLC was the licensed grain dealer and was classified as a partnership for tax purposes, but was not a cooperative.  After the LLC was formed, the taxpayer got out of the grain business and surrendered its grain licenses under a non-compete agreement with the LLC.  The taxpayer's patrons could continue to sell to the LLC.  The taxpayer wanted to treat the LLC's purchases of grain as its own, the LLC's payments as patronage allocations and that the purchases were deductible on the taxpayer's return as PURPIMs.  The IRS determined that such treatment was not allowed because the purchases were by an entity that was not subject to cooperative taxation under Subchapter T.  The IRS also determined that there was no facts that provided an argument that the LLC was acting as the taxpayer's agent.  IRS noted that a payment to a co-op patron for grain cannot be treated as PURPIM unless it is paid by means of an agreement between a co-op and the patron.  That didn't exist.  F.S.A. 20150801F (Apr. 22, 2014).


The IRS Chief Counsel's Office has issued guidance to IRS agents to assist in determining whether the TEFRA audit procedures apply to a partnership.  The Chief Counsel's Office noted that the TEFRA/non-TEFRA determination is to be made at the beginning of the audit of the partnership.  The small partnership exception of I.R.C. Sec. 6231 is then determined to apply or not based on the partnership return.  As such, the small partnership exception is only for purposes of the partnership being exempt from the TEFRA audit procedures and does not mean that the entity is not a partnership for other purposes.  C.C.A. 201510046 (Jan. 23, 2015).   


The plaintiff, a ranching operation, bought a 100-acre tract along a road which included surface rights necessary for irrigation water from canals that diverted water from a nearby river.  The defendant organized itself as a water users' association that assessed dues on adjoining landowners to the canals for the purpose of covering the cost of maintaining the canal system.  The defendant claimed that the plaintiff became a member of the association obligated to pay assessed dues upon buying the tract, and assessed $9,500 in dues on the plaintiff that the plaintiff could not opt out of.  The plaintiff challenged the assessment on the basis that the defendant was not qualified to operate under state (ID) law.  The trial court agreed and upheld the assessment, and also ruled for the defendant on contract-based equity theories.  On appeal, the court reversed.  The court determined that the defendant was not authorized to operate under ID law on the basis that the canals were fed by water that was in a natural watercourse rather than a canal or reservoir as ID law required and because only two users (rather than the statutorily-required three or more) used water from a qualified source.  The appellate court also rejected the trial court's equity-based theories.  In addition, the appellate court granted the plaintiff's attorney fees and costs on appeal.  Big Wood Ranch, LLC v. Water Users' Association of the Broadford Slough and Rockwell Bypass Lateral Ditches, Inc., No. 41265, 2015 Ida. LEXIS 75 (Idaho Sup. Ct. Mar. 2, 2015).


The U.S. Court of Appeals has now joined the Ninth and Eleventh Circuits, in finding that inserting a qualified intermediary between related parties does not avoid I.R.C. Sec. 1031(f).  The plaintiff, a subsidiary of a Caterpillar dealer that sold Caterpillar equipment, ran the dealer's rental and leasing operations.  The plaintiff sold used equipment to third parties who then paid the sales proceeds to a qualified intermediary.  The qualified intermediary forwarded the sales proceeds  to the dealer who then purchased new Caterpillar equipment for the plaintiff and then transferred the new equipment to the petitioner through the qualified intermediary.  The arrangement provided favorable financing from Caterpillar and the dealer had up to six months from the invoice date to pay Caterpillar for the petitioner's new equipment.  The petitioner claimed the transaction was non-taxable as a like-kind exchange.  The trial court agreed with the IRS that the transactions failed I.R.C. Sec. 1031(f) and the appellate court agreed.  The court determined that the case was factually similar to Ocmulgee Fields (10th Cir 2010) and Teruya Bros. (9th Cir. 2009).  North Central Rental and Leasing v. United States., No. 13-3411, 2015 U.S. App. LEXIS 3383 (8th Cir. Mar. 2, 2015), aff'g.,  No. 3:10-cv-00066 (D. N.D. Sept. 3, 2013).


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