DISCLAIMER: Matters discussed this column are of a general nature and should be construed as applying to any particular fact pattern. Readers are encouraged to seek legal counsel regarding the issues discussed in this column. No attorney client relationship is established by this general news article nor should it be taken as legal advice. Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended to be used for the purpose of avoiding penalties under the Internal Revenue Code.
Vol 1. Pop Quiz? Name the only segment of the economy with a division of government devoted to it. The answer is agriculture. From the regulation of food preparation to the use of food aid as a foreign policy tool, agricultural and the laws surrounding it impacts all of us whether we like to admit it or not. The term agricultural law may not as common as personal injury law or divorce law , but make no mistake, agriculture and the law are forever intertwined. It naturally follows that where government is, so will be the lawyers advocating for their client. Much like a farmer, an agricultural lawyer in rural Iowa has to know a little bit about of lot of things related to agricultural law and be willing to know when it is time to get a dedicated specialist. This column will touch on the various segments of agricultural law trends and identify the potential impact on members of the northeast Iowa farm community. Estate planning, business planning, government farm policy and taxation readily come to mind as legal issues facing the farm community. However, food safety regulations, interpretation of federal pesticide laws, land use regulation decisions and foreign food aid policy have an impact on our local community, often time without knowledge until far after the decisions have been made. One of the recent decisions by the Supreme Court causing a stir is in the area of government taking of private property. The Court applied the government’s right of eminent domain to allow a city to take a private citizen’s land and after paying for it, turn the seized property over to another private citizen who put it to use for profit. In the struggle between expanding urban population centers and agricultural land owners, this precedent could be used to the detriment of land owners. Iowa’s legislature has begun to take steps to limit that application of power. However, sometimes state laws, no matter what the reasoning may run afoul of federal preemption be struck down. For example, the federal Supreme Court has found that the Texas’s attempt to allow pesticide users whose pesticide did not perform as expected was preempted by federal pesticide law that largely protects the producers of pesticide from being sued. The Court’s decision centered around theoretical Constitutional principles balancing state’s rights versus Federal government’s rights. In application, the impact on agribusiness is real and definite, the restriction to litigate about a defective product Despite a state level right of action against a supplier of product, federal law may stop a party from seeking recovery against the supplier. These are two examples from high profile cases. Other shaping of our agricultural laws occur with far less time in the lime light. The National Appeals Division of the USDA determines compliance issues with farm programs in an administrative law setting. The Tax Court issues decisions on what is allowed for current year expenses and what must be taken as a capital expense. Choices by political figures, such as Iowa’s Attorney General, to issue a consent decree rather than fight with large hog concerns like Smithfield have impacts on other hog producers ability to obtain a fair price for their livestock. Reviewing laws and regulations and trends in the legal community with an eye toward the impact on agriculture will yield a fresh perspective. In the months ahead, a closer examination of the various areas and issues of agricultural law will be examined. Selected Agricultural Law Events A corn picker operator successfully argued that he had not assumed the risk as a matter of law where he was injured while attempting to clean husking rollers by using corn stalks to free cobs while the machine was engaged. A horse owner was unable to obtain damages from a land owner in Texas where the horse was attacked by fire ants. The court noted that the fire ants were natural condition beyond the control of the landowner and was a normal risk of riding a horse. Co executors who elected not to pay federal taxes where found liable for the non paid taxes plus interest for the time the executors served the estate, but not for interest after the executors resigned. A poorly drafted sales agreement led defendants to believe they had the right to remove all timber from an access easement area. The plaintiffs filed suit upon return from vacation to discover removal of all timber in the easement area. The court ruled the sales agreement only allowed for limited removal of trees and granted treble damages to the plaintiffs for the extra trees removed.
Published on April 20, 2006 in Northeast Iowa Farmer vol 1, no. 2 Long Term Health Care Planning under the new Medicaid Rules On Feb 8, 2006, the Deficit Reduction Act of 2005 was placed into the law. Among the provisions aimed at curbing the federal debt including raising the bankruptcy filing fee, were provisions that drastically change the way Medicaid (aka Title 19) is administered. Medicaid is the state administered, federally funded program designed to provide care to those who have no other assets to pay for long term care in facilities such as nursing homes. The changes made to the application of this program are significant. First, the “look back” period for asset transfers is changed from 3 years to 5 years. This will create an increased record keeping burden on applicants for program to provide 5 years of financial data for review. Next, the application of the period of ineligibility is modified. Under the old rules, a transfer within the look back period created a period of ineligibility beginning with the date of transfer. For example, Father gives his $24,000 of equity in the combine to Son in February 2002. Father then applied for Title 19 coverage in February 2004. Under the old rules, the average nursing home care for a month (approximately $3,000) is divided by the amount of the gift (here $24,000/$3000) that results in a period of months of ineligibility. In this example creates a period of ineligibility for Title 19 coverage from Feb 2002 until Sep 2002. Since Father is not applying until 2004 it is not a show stopper. Under the new rules, the period of ineligibility begins upon application, not upon the transfer. In the same example, if the transfer of equity occurred in Feb 2006 and the Father applied in 2008, the inelligility period begins in 2008, not 2006. This raises concern as to how Father is expected to pay for care during the period of ineligibility. A hardship provision is included, but the application of this hardship waiver has not been tested yet. It would appear that any transfer, regardless of the purpose, will be examined under this new rule. It follows that transfers before 5 years prior to the application for assistance with nursing home care are the only safe transfers. These are just a few of the law changes to Medicaid. So what is the implication to agriculture? Planning early instead of waiting until a member of the elder generation is in the home or about heading that direction becomes absolutely necessary in some cases to avoid loss of assets. In some cases, the major asset of a family is the ground they have worked their entire life. In many cases, the elder generation is just finishing paying off the mortgage. Now, that generation must consider how to pass that achievement to the next generation without endangering it to a new set of creditors, the government. Business succession planning, estate planning, and communication between generations become even more important under the new rules. Serious thought should be given to long term care insurance to preserve assets built by the elder generation if the goal is the passing of the assets. Other options include transferring business assets to the next generation at an early age and becoming an employee of the next generation of owners of the business. Or simply, thought should be made regarding calculating the amount of assets to be dedicated to nursing home care. This calculation should be undertaking considering that the average cost of nursing homes is between $3000 and $4000 per month and the average stay in a nursing home is 3.5 years. As with any new law, challenges to it will be raised. Indeed, a suit filed attempting to declare the law void because a typo error between the House and Senate version of the bill was filed one week after the law was enacted. Regardless, it appears the federal government is desires change in this area and they will most likely achieve it. Action, not inaction is the key to ensuring this new development in the law does not adversely impact agricultural operations. Recent Ag Law Developments A plaintiff’s property was divided by a road used by other property owners, the school bus, and other members of the public. While it was not officially designated a road, the county maintained it with gravel, cattle guards, and snow plows for over 50 years. In 1999, the county gave the road a name and the plaintiff’s sued. The county won and the road is considered public property. Cattle Ranchers had a grazing permit on federal national forest which expired upon sale of the ranchland. The ranchers claimed a charitable deduction to the federal government when they sold the ranch and the permit reverted to the government. The tax court disagreed and found the grazing permit was not a property right and therefore could not be charitably donated. Lender number 1 provided funds to Farmer to purchase a tractor and perfected a security interest in the tractor filing with the secretary of state under the first name Roger when the true spelling was Rodger. Lender number 2 also provided Farmer funds and filed with the secretary of state but with the correct spelling. When Farmer filed for bankruptcy, Lender number 1 was found to be not secured because of the misspelling and as a result, the proceeds from the sale of the tractor were paid to Lender number 2. Horse Theft. Uncle was visited by Niece. Niece’s son wanted one of Uncle’s horses for 4-H project after riding an older horse. Niece made a paddock for a horse and Uncle delivered the horse but, refused payment from the niece, noting that ownership was an issue between the Uncle and the niece’s son. Three years later the horse was no longer used and the Uncle asked for it back. The Niece claimed it was a gift and refused. Uncle entered Niece’s property and took the horse. Niece sued for theft and trespass. Niece was awarded $1 for trespass and the uncle was found not to have loaned, not stolen the animal. no 3 Make no mistake, Iowa is a livestock state. The population of rural Iowa has the unique opportunity to witness first hand how food is produced. Even those in rural Iowa who do not directly participate in the production of food and fiber can mark the changing of the seasons based on what type of farm equipment they share the roads with. Another occasional reminder of our presence in ?farm country? is the associated odors that come with rural living. Yet, Iowa is a hot bed of litigation regarding farm nuisance suits. Plaintiff?s complain of farm practices that interfere with the use and enjoyment of the plaintiff’s property. Iowa, like many states, adopted various laws designed to recognize the inherent qualities associated with livestock production and protect those who engage in this industry that is vital to Iowa’s economy. Part of this recognition was a provision to prevent lawsuits against farm operators who were using generally acceptable production practices. Unfortunately in 1995, the Iowa Supreme Court invalidated these protections in Iowa that are considered valid in other states. The Court used an analogy that the right to bring suit was a property right and therefore, the law that prevented bringing suit was a taking of a property right without compensation. This taking without payment is prohibited by the 5th Amendment of the Federal Constitution applied to the states via the 14th Amendment. Even some of the most progressive real property scholars have found the Iowa Supreme Court?s analysis questionable, but the Federal Supreme Court declined to review the issue. It is interesting to note that the one of the attorney’s involved in attempting to obtain review by the Supreme Court was John Roberts, who is not the Chief Justice of the Federal Supreme Court. However, legal doctrines prevent another request for review just because the bench has changed. Without this protection from suit, producers have been subjected to a number of lawsuits for a variety of reasons, including nuisance based on odor, bee?s wings drift, noise, allegations that the sulfur emitted caused brain damage in an 18 year child and contamination of underground oil reserves by animal waste. The lighting rod for these actions seem to be hog confinements. The Iowa DNR has extensive regulations and rules regarding animal feeding operations, yet compliance with these regulations does not prevent suit from adjoining landowners. However compliance does appear to reduce the grounds on which plaintiffs may base their claims. It is interesting that the odor survey commissioned by the Iowa Department of Natural Resources found very few instances where hog confinements odor emissions violated the toughest standard the department could find to compare the emissions against With most legal actions, it seems many of these nuisance cases come down to dollars. In swine nuisance cases in the state of Iowa in 1994-2005, successful plaintiff’s were able to obtain damages for reduction in property value, thought the amounts were far less that asked for. In a couple of cases, damages for personal discomfort etc were awarded though not for the amount anticipated or requested. The changes in farm production practices to confinements and nuisance cases that go with them are a classic example of the ever changing landscape agribusiness owners face. If you had told a farmer in 1960 that he could be sued for raising hogs, he would have laughed at you. Likewise, had you told that farmer how many hogs you could fit in a confinement structure, you would receive the same result.
Recent Ag Law Developments Cattle Ranchers had a grazing permit on federal national forest which expired upon sale of the ranchland. The ranchers claimed a charitable deduction to the federal government when they sold the ranch and the permit reverted to the government. The tax court disagreed and found the grazing permit was not a property right and therefore could not be charitably donated. Lender number 1 provided funds to Farmer to purchase a tractor and perfected a security interest in the tractor filing with the secretary of state under the first name Roger when the true spelling was Rodger. Lender number 2 also provided Farmer funds and filed with the secretary of state but with the correct spelling. When Farmer filed for bankruptcy, Lender number 1 was found to be not secured because of the misspelling and as a result, the proceeds from the sale of the tractor were paid to Lender number 2. In 1985, the top four meat packers slaughtered 39% of the cattle and 32% of the hogs. In 2004, the top four meat packers slaughtered 71% of the cattle and 64% of the hog
No 4. My friends who live in Des Moines know that I occasionally refer it Des Moines as the “Heart of Darkness”. When they protest, I remind them that most of the dramatic impacts on farmers have their origins in Des Moines, the seat of our state government. Recent actions from Des Moines have supported my view. Consider the Iowa Supreme Court, seated in Des Moines, ruling in Tetzlaff v. Camp and Pangborn. In the facts of the case, Pangborn rented crop ground to Camp, who surface applied manure to the crop ground. Tetzlaff brought suit against both, claiming nuisance, trespass, and negligence. The high court reversed the district court’s ruling that as a matter of law, a landowner who leases ground cannot be held responsible for the nuisance created by the tenant. The court found that a landowner who RENEWS a lease with notice that the tenant?s prior use resulted in nuisance may be liable for the tenant? nuisance. In doing so, they applied the following test ??at the time of the lease did the land owner know consent or have reason to know that the tenant is undertaking an activity that if the land owner took the same action may result in a nuisance and that the land owner knows or should know that that tenant is already causing a nuisance or will cause a nuisance? This is the first time the Court has decided a case under this set of facts and had to look to a New Hampshire case for an example of another court who ruled similarly. The Court did not find the landowners responsible, it merely ruled that the land owner COULD be responsible. The court went one to stress that the general rule is still that the land owner is not responsible for tenants acts unless the land owner knows the activity to be carried on and that the activity will necessarily be a nuisance. In application, it would appear at any land owner whose tenant accepts manure under a manure management plan or manure easement arrangement may in some cases, become responsible for the potential nuisance created. Land owners should review leases with an eye not only for the rent increase but also potentially seek indemnification and hold harmless agreements from the tenant who use manure as part of the operation. Other recent actions include the veto of a bill designed to limit eminent domain for economic development but allow for the traditional uses of eminent domain. It was clearly supported by a large percentage of elected legislators from the entire state, but a single stroke of the pen by the governor defeated the farm land?s protection from encroachment by urban developers when no clear PUBILC use is required. Of the 47 states who reviewed eminent domain provisions, Iowa joins New Mexico as the only states to have the governor block a change to the law. Also, the governor failed to execute a law designed to limit the power of a Department of Natural Resources personnel to use discretion instead of adopted rules to implement policy in such areas as livestock permitting functions. Again, this measure had wide support and is a disappointing result.
Vol 5. Ommitted
No 6 Those who are just beginning the farm operation or those who are slowly withdrawing from it would do well to familiarize themselves with the Internal Revenue Code § 183 “Activities Not Engaged in for Profit”, occasionally referred The “Horse Shelter” or Hobby Loss Rules. This code section is designed to prevent tax payers from claiming business losses (and thereby reducing income available for taxation) on activities that the tax payer primarily engages in for recreation, entertainment and personal enjoyment rather than a legitimate business purpose. Specifically, horse farms and cattle operations of small sizes are eyed with greater scrutiny. The IRS has historically found this a difficult area to litigate in, but has developed training manuals and policies to help examiners who may have no knowledge of farm operations, in order to ensure compliance with the Internal Revenue Code. A review of the training manual shows the IRS attempts to familiarize its agents with the world of competitive show animals, but also the distinction between registered herds of cattle and commercial herds of cattle. The manual advises examiners to consider calculating the volume of feed purchased versus animals sold to ensure no under reporting of income, such as cash sales. Several Factors are reviewed by the IRS, and each one is briefly examined below. Books and Activities maintained. The examiner will review the level of sophistication of the records, notably if the enterprise has a separate check book from the personal living expense check book of the tax payer. The mere presence of records is not enough, the tax payer must show it is relying on the records to make decisions and changes to the operation to make it profitable, not just to satisfy, for example, a breed association records keeping requirement. Business Plan. The examiners want to review a formal, written business plan demonstrating realistic growth and economic forecast for the enterprise, that if successful, would result in a viable operation. Relying on occasional profits or windfall activities, such as only being profitable in the event of twin colts fails to meet the concept of a solid business plan. Methods and Efficiency of the operation. The IRS will review the use of experts or specialists by the tax payer in order to achieve profitability. A good example of this is documentation of Iowa State service programs and publications consulted and demonstrable selection criteria for genotype of seed or breeding stock selected and retained. If the tax payer has failed to heed advise to change operations without a justification (like lack of funds to change), this will cause concern on the part of the examiner. Likewise, if the tax payer devotes little time to an activity but generates a large loss, it will attract scurnity. Disguised expenses. Consider for example, over zealous advertising via ?Vanity ads? will attract the attention of the examiner. Consider the true purpose of any advertising spent by the operation. An ad with a picture of a child and horse wishing luck to the tax payers children in the upcoming horse show is not viewed usually as a legitimate business expense. Potential for increase in the value of assets. If a business is showing a loss, but can demonstrate that its assets (like land) will increase due to the business activity over time, it may help appease examiners concerns of hobby loss. The intent to capture the increase in value must be demonstrated as well. Tax Payers success in other activities. A tax payer with high profitability in side line restaurant who yearly loses large amounts on cattle production because of high expenses will be scrutinized to determine if his best efforts are also being applied to the cattle operation. Additionally, a tax payer with substantial sources of income have not faired with the Tax court. Pleasure element. The IRS training manuals warn its examiners not to be lulled by the argument that farming is a drudgery, though case law supports the concept that devoting hours upon hours to the inputting of crop, attending to calving and foaling at all hours of the night and enduring the elements is not normally undertaken without a profit motive. And the internal revenue service does not mandate that tax payers cannot enjoy their income production. However, passion with out profit paints the picture of an enterprise not undertaken for profit. Much of this can be avoided by showing a profit. A presumption in the law indicates that a profit once every certain number of years depending on the enterprise, shows the activity is engaged in for profit. The bottom line is to ensure that business losses are legitimately related to the pursuit of profit. A court once noted, hogs get fat, pigs slaughtered. The message of the court has application in tax preparation as well.
No 7 Montezuma, Iowa residents filed a nuisance suit against a proposed ethanol plant. The plaintiff’s claim the plant, if completed, would lead to increased traffic, possibility of fire, leaks or explosion and disproportionate use of the aquifer water reserves. They also allege the water vapor will prevent small aircraft from landing at Grinnel Airport. This is notable for the obvious application to other ethanol facilities, but also for the allegation concerning water rights. Traditionally, Iowa has operated under the reasonable Riparian doctrine regarding surface water rights and not much fuss is made because plenty water is available to go around. Some lawyers in other parts of the country, particularly in the South west and in the West make their living doing nothing but fighting about water rights. Most of those states have a different doctrine of water usage, the prior appropriation doctrine. In that doctrine, first user has priority and if not enough water exists to satisfy all users, the first user gets priority. In these states, the process is formalized and is usually a matter of public record and a permit system. The allegation regarding aquifer use in the Montezuma case could be a vehicle to establish a legal doctrine regarding sub surface water rights. States can apply the absolute ownership model, where surface owners can draw as much as they please, but most have limited this absolute by applying reasonable limitations to the withdrawal. Under another methodology, correlative rights, establishes the premise that if a land owner is over a water supply that covers more than one piece of real estate, an land owner of a deep well tapping that water supply may be forced to divert water to an adjoining landowner if the deep well would leave the neighbor ?high and dry.? Minnesota has codified its priority use of water, and it places agricultural uses behind domestic water supply (to exclude industrial and commercial use) and any use of water less than 10,000 gallons of water per day. Behind agriculture is power production and high volume industrial use. I do not believe subsurface water rights issues are going away anytime soon. As the countryside loses population that has a connection to agriculture, the industries ability to rest on its image as “provider of food for all” will fade. Furthermore, legislative priorities are often set by largest voice. Consider the Minnesota scheme for water use. As urban areas already have the priority for domestic consumption but industrial use behind agriculture. As the demand for jobs and power grow, will agricultural use be knocked down below industrial use of water? The outlooks is not all that impressive for agriculture. Less farm families means less voters to select rural legislators to advocate for their interests. Less legislators held accountable to the rural population means less clout in chambers of the legislative body. And obviously, less clout means less protection. It would appear Iowan have a choice in how to handle this in future. Perhaps the rural population would be best served to address it before it loses what clout it has. Recent news. South Dakota Bull. Bull vs. Car, Bull owner not held liable as a matter of law. The court required an evaluation of the bull’s previous escape attempts, fencing, proximity of the highway and amount of traffic upon it to the location of the bull pen and other surrounding conditions before the bull owner could be held liable. Farm Labor: 1,202,000 hired workers (875,000 hired directly by farms, the remainder provided by service companies) on the nations farms as of 15 July 2006, a reduction of 11%. Field workers averaged $ 8.95 per hour while livestock workers averaged $9.30.
No 8 Despite the ever increasing size of equipment and the leaps and bounds in robotic technology, farm business operators still hire assistants and specialists to help out at critical time of the year. Planting and harvesting are two prime examples of those critical times. The way the operator hires that help determines if the operator is responsible for federal tax reporting obligations. First, the help hired needs to be classified as a contractor or an employee. The IRS uses a 21 point checklist to help it determine if the relationship is a contractor or employee relationship. The parties proclamations of the relationship status is not controlling. The overall theme of the checklist is if the operator controls how, when and where the other party works, it looks a lot like an employer-employee relationship. If the party sets is own hours, provides its own equipment and takes work from other operators, it begins to look more like a contractor relationship. Consider the difference between a neighbor who combines for hire after his own fields are harvested and a retired farmer who combines for one active farmer that farmer tells him when and where to combine with the active farmer?s combine. The first is more than likely an independent contractor and the second is likely an employee. If the relationship is an employment relationship, then the farmer becomes subject to additional regulations. The farmer is subject under the Fair Labor Practices Act of 1938 (minimum wage) if more than 500 "man days" (labor for at least 1 hour) per quarter are worked on the farmers behalf. Generally, as long as less than 5 employees are present, this act will not be triggered. And spouses, parents, children, stepchildren and siblings do not count towards the calculation. Furthermore, wages paid to farm workers (not contractors) are subject to Social Security and Medicare taxes unless exempt by one of the following Payroll less than $2500 total Employee earns less than $150. The wages are paid for hand harvested crops additional criteria are met. As costs rise for labor, more and more operations, even small ones, need to keep an eye out and not run afoul of the IRS or federal wage laws. The penalties for non compliance are far worse than the burden of compliance.
No. 9. Farm Succession Planning The complex dance of passing the family farm from one generation to the next, while balancing taxation concerns, estate planning, emotional connection to the land, off farm heirs expectations, long term care planning and lack of family communication can be overwhelming to the most anyone. Consider the following case of family who did not take the time to plan or communicate with one another with disastrous results. Givens v. Fowler, 984 P.2d 1092 (Wyo. 1999). Son resigned his non-farm job in 1974 and moved to Wyoming to manage his father?s ranch with the understanding that he would inherit the ranch upon the last of his parents to die. In 1992, the father (the surviving parent) asked the Son to leave the ranch. Upon the Son?s refusal to leave, the father filed an ejectment action against the Son. The Son counterclaimed for breach of contract, alleging that he and his father had an oral contract which provided that the son would receive the ranch upon the death of his parents in exchange for his running the ranch. The trial court determined that an oral contract existed and awarded the land, livestock and machinery to the son subject to the father?s life estate. The father appealed and also amened his estate plant to disinherit the son, making a daughter the sole beneficiary of the father?s estate.. After the father died, the Wyoming Supreme Court reversed the trial court and said no contract existed. So the son, after nearly 20 years of work, ended up with no job, no inheritance, strained (at best) family connections and presumably plenty of legal bills. Had the family considered structuring the transition from father to son and making plans to include the daughter or provide her with another source of income the result would have been much different. Farm succession planning is usually in one of three stages when it begins, farms that do not plan to survive past the current generation, farms that are making plans to have the farm survive and those who refuse to pick one of the first two. Often times the elder generation have specific concerns that must be addressed before any plan is approved. These concerns are wide and varied, but frequently include preventing a heavy management burden upon the surviving spouse and preventing a remarriage of that surviving spouse to the harm of the children from the first marriage. Other concerns include limiting estate taxes, income flow to the elder generation and providing for off farm heirs Succession planning is not something that is usually resolved after Thanksgiving dinner and before the desert is served. It frequently involves serious discussion and planning by multiple generations of families. Goals and desires of each generation are not often exactly in line with one another. Often times, professionals can provide objective input to a succession plan to ensure the parties objectives and goals are not unreasonable. The issue of the golden rule must be addressed. Usually those who have the gold make the rules. While frequently money is the gold, in some family dynamics, labor is the gold. Regardless, an open and frank discussion regarding who is going to weld the power of decision making needs to be had. This is just a small sampling of the issues that a comprehensive farm succession plan should address. What should be kept mind that maximization of all aspects of the farm succession plan is highly unlikely. A model where the elder generation gets plenty of income and retains ownership and control of the farm while not providing labor, off farm heirs are entirely happy but not interfering with on farm heirs ability to run the farm, on farm heirs are secure and able to grow the business and no one pays any taxes has not been achieved. In other news, the IRS has officially given up the Federal Excise tax of 3% on long distance telephone calls to fund the Spanish American war. Yes, one hundred and eight years after the end of that conflict, the ?temporary tax? to fund the war will no longer be collected by the IRS. You can apply this year for a predetermined amount (which is yet to be determined) or submit the actual amount paid in taxes since February 2003. As of Oct 17, 2006 the Chicago Board of Trade and the Chicago Mercantile Exchange are officially planning to merge. I do not think that further merging of markets is necessarily a good thing for the individual farmer. Consider the consolidation of ?Big Meat? in the last 15 years and the powerful positions organizations like Tyson Foods and Cargil already have in the marketplace. And while I am not a big fan of big government, the Commodities Futures Trading Commission (the regulatory arm of the government for the futures market) has a budget 8 times smaller than the Securities Exchange Commission, and the CFTC must regulate the merged company which by itself is 20% bigger than the New York Stock Exchange. Given the scandals in the investment community, it not a hard leap to think such corruption will or is in the futures markets as well.
No. 10 I am concerned about the Iowa Environmental Protection Council?s recent action regarding manure application to soybean ground. It apparently will allow the practice for a number of years (2011 if you believe they will not modify the current plan in the future) at a limited rate of application. I note that it is only for injection, not surface application. While lots of articles have been published about the lack of basis in scientific evidence and the policy being at odds with the states own land grant university?s recommendation, my concern is how the rule came to be. Iowan?s did not elect a single member of the EPC, they were all appointed. If none were elected, how can we voice our displeasure with their actions? I find it interesting that apparently, none of the EPC members who farm, inject manure. They all surface apply manure. Therefore the ban has no impact upon them. Seems awful easy to make rules about things that do not impact you directly. I do not think it is a big leap for the EPC to go from making restrictions on farming to protect water quality to making restrictions on farming to protect air quality. Livestock operations would be an easy target for another rule not based on science. Perhaps a rule regarding size of operation would be adopted as an attempt to address air quality concerns, regardless of scientific data. That would be another round in the ongoing debate about the future of livestock production in Iowa. The debate has raged in Iowa for the last 15 years, and to date, no answer, to include suing the operations who have livestock, has satisfied the general public. Some speculate that in the end, the Iowa Supreme Court (which many feel has not been pro producer in the last decade) wants to foster the development a “smell easement.” The Court has characterized the right to sue regarding nuisance as a property right. Property is something tangible to be bought and sold. I would be curious to see how the market would set a price for something like that. I suppose one could look at the results of most of the nuisance cases filed against livestock operations. On average, it would appear the damages are limited to a 10% reduction in the value of a home that is with in close proximately to the offending facility. That damage payment then provides a right to continue the livestock operation without further damage payments In other events, while tax planning is something that should be contemplated through out the year, a look at some tax provisions seems appropriate at year end. First, capital gains are still at near an all time low. While paying tax of any type is against some folks core value, it may be appropriate to consider triggering gain tax on a highly appreciated capital item like land. While Section 1031 exchanges allow for the deferral of the taxes, the future may have higher capital gains rates. Second, the accelerated depreciation provision of the code § 179 is indexed for inflation to $108,000 this year. That means that $108,000 of purchases that normally are slowly depreciated out over the expected useful life may be taken in a lump sum. Current law calls for this figure to be returned to a mere $25,000 in 2010. And finally, the domestic production activities deduction is modified to make it a little less likely to be of value to the small agribusiness operator.
No. 11 The IRS steps up its campaign to categorize CRP Payments eligible for Self Employment Tax Since 2003, the Internal Revenue Service has been waging a campaign to characterize income received under Conservation Reserve Programs as income eligible to be taxed under self employment tax rules like it was income from a stand alone business. This is not position that will favor retiring farmers, or those holding farm ground with CRP acres for recreational purposes such as hunting. They have been able to call the income rents under schedule E or non material participation under Form 4835. The IRS?s position, however, won?t dramatically affect those with active farming operations who have deductions from other portions of the farming operation to off set the income generated by the CRP payment. The position, if upheld, has the potential to ooze over into other federal programs like Wetland Reserve, Conservation Security Program and the like. The IRS?s position has been resisted by farm state legislators, to include Rep. Earl Pomeroy of North Dakota, who has strongly advocated that the IRS?s stance is not in line with established tax law. In 2004, the IRS received a file of materials outlining the problems with its position. In 2005, the IRS admitted to losing the file, and after a replacement file was submitted, in December 2006, the IRS maintained its stance that CRP payments are to be reported on business schedule, making the payments subject to roughly a 15% self employment tax. The key issue is whether or not participation in a CRP contract is a trade or business. The IRS’s stance is that the tilling and weed control required by the CRP contract makes it a regularly maintained business activity as it occurs regularly and frequently. It is apparent that the IRS did not consult the USDA before determining that weed control or tilling and seeding are a regularly occurring. As CRP contract holders well know, weed control is at the largess of the government, not something that can be undertaken on a whim. Large numbers of earth moving equipment were hired this last summer to remove volunteer trees that had crept into the CRP lands. These trees had to be removed before the contracts were renewed. The growth of trees in the CRP lands looks more like infrequent weed control and tilling rather than regularly occurring weed control. The imposition of a SE tax on CRP acres can make investment in those type of acres less desirable. Perhaps the “big city hunter,” (who is frequently blamed for rising land prices on marginal farm ground) will take the investment money elsewhere. Or, perhaps, the widowed landowner, when faced with the prospect of paying SE tax on CRP acres, will decide to sell and seek better returns on her capital elsewhere. Maybe these will put an operating farmer in a better position, but I doubt it. More likely, in the case of a farm with some CRP acres and some rentable land, I would think the rent on the tillable acres goes up to account for the SE tax imposed on the CRP land. That does not help the operating farmer.