Center for Agricultural Law and Taxation
Many of the key agricultural and taxation developments in 2018 continue to significantly impact agricultural producers, and we will continue to monitor these evolving issues as we head into 2019. Happy New Year!
1. Tax Cuts & Jobs Act significantly changes tax rules for agricultural producers.
The most sweeping legal change applying to most agricultural producers in 2018 has been the implementation of the Tax Cuts & Jobs Act signed into law December 22, 2017. In general, the new law provides modestly lower tax rates for individuals, a new 20 percent deduction for qualified pass-through business income, a 21 percent flat tax rate for corporate income, and a number of changes impacting depreciation, expensing and losses. As we approach the 2019 filing season, a number of questions still remain. We have only proposed regulations for the new 199A Qualified Business Income deduction and bonus depreciation and we have not received any guidance on the complex fix to the grain glitch. A number of ambiguities remain, but several, in particular, present special difficulties:
- What rental income qualifies for the 199A deduction?
- How should we allocate income and expenses under the grain glitch fix and what is the full impact of the DPAD transition rule on cooperative patrons?
2. New Farm Bill passes, making modest changes.
The year ended with President Trump signing a new farm bill into law on December 20, 2018. The Agricultural Improvement Act of 2018, generally referred to as the 2018 Farm Bill, stems from the work of a conference committee convened to reconcile differences between Senate and House versions passed earlier this year. The final bill is a compromise, prompted by the need to implement programs to assist farmers struggling with market and price uncertainties. Generally the bill veers little from status quo. The conference committee eliminated provisions that would not gain bipartisan support, including stricter work requirement for SNAP recipients. The Senate passed the final bill by a margin of 87–13 on December 11. The House followed suit on December 12, by a margin of 286-47. More than 75 percent of the $867 billion price tag over a 10-year period funds the SNAP program.
The new Act overhauls the failed dairy margin protection program, legalizes the production of hemp as an agricultural commodity, and tweaks funding for various conservation programs. The new law does not, however, change payment limitations or enhance “active participation” requirements. In fact, it extends an exception from “actively engaged in farming” requirements to first cousins, nieces, and nephews within family farming operations.
For a more detailed review of provisions in the new farm bill, click here.
3. Proposed rule would narrow the scope of WOTUS.
On December 11, 2018, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers proposed a revised definition for “waters of the United States” or WOTUS. This definition, if finalized, would determine which waters are subject to the jurisdiction of the federal Clean Water Act (CWA). As proposed, the rule would significantly narrow the scope of WOTUS, particularly in comparison to the 2015 Clean Water Rule.
WOTUS has been the subject of litigation and controversy since the final Clean Water Rule was unveiled on May 27, 2015. Because of the pending litigation, the 2015 rule is currently in effect in only 22 states. The rule is stayed for the remaining states because federal courts have determined that states challenging the rule were likely to succeed on the merits of their legal claims. In those states, a pre-2015 legal framework applies. Specifically, these states have alleged in their complaints that they are harmed because the Clean Water Rule expands the number of waters subject to federal jurisdiction, erodes states’ authority over their own waters, increases the burdens on the states to administer federal water quality programs, and undermines state sovereignty. The 2015 rule unleashed a complex procedural saga that is still unfolding. The proposed rule, if finalized, would end that chapter of legal wrangling, and perhaps begin a new one.
In particular, the proposed rule would restrict CWA jurisdiction over adjacent wetlands to those with a direct hydrologic surface connection to jurisdictional water. It would also prevent isolated ditches, lakes, and ponds from being subject to federal regulations. For a detailed review of the proposed rule, click here.
4. U.S. Supreme Court may decide whether Clean Water Act jurisdiction exists over point source discharges passing through groundwater.
Although the proposed WOTUS rule specifically states that groundwater itself, including that drained through sub-surface drainage tile, is not WOTUS, it does not answer the question of whether groundwater as a conduit for pollutants can lead to CWA liability. This is an issue that the agencies are separately considering.
On April 12, 2018, the United States Court of Appeals for the Fourth Circuit vacated a district court’s judgment and held that a discharge that passed from a point source through groundwater to navigable waters could support a CWA claim. The Fourth Circuit in Upstate Forever v. Kinder Morgan Energy Partners, L.P. became the second federal court of appeals to make such a ruling in 2018. The first was the Ninth Circuit in Haw. Wildlife Fund v. Cnty of Maui. On September 24, 2018, the United States Court of Appeals for the Sixth Circuit took a different approach and held that the CWA does not apply to pollutants that travel through groundwater before entering navigable waters. Tenn. Clean Water Network, et al. v. TVA, No. 17-6155 (6th Cir. Sept. 24, 2018); Ky. Waterways Alliance v. Kentucky Util. Co., No. 18-5115 (6th Cir. Sept. 24, 2018). These cases, in addition to the EPA’s recent request for comments regarding this issue, signal a push for certainty on the long-time question of whether indirect discharges from point sources, through groundwater, and into navigable water are subject to regulation under the CWA.
Petitions for certiorari are currently pending before the U.S. Supreme Court regarding this question. Click here and here. On Monday, December 3, 2018, the U.S. Supreme Court asked the U.S. Solicitor to file briefs in the pending cases expressing the views of the United States on or before January 4, 2019.
We should find out shortly whether the high Court will take up the issue in 2019.
5. Trade disruptions trigger Market Facilitation Program payments.
2018 has been a difficult year for producers. Commodity prices remain low, in part driven down by a trade dispute with China. On August 27, 2018, Secretary of Agriculture Sonny Perdue announced details of new programs designed to assist farmers in response to ongoing trade disputes. USDA authorized $12 billion for three primary programs:
- A new Market Facilitation Program to provide payments to corn, cotton, dairy, hog, sorghum, soybean, and wheat producers, beginning as early as September 4, 2018.
- A Food Purchase and Distribution Program to purchase the unexpected surplus of affected commodities.
- A Trade Promotion Program designed to restore lost markets and develop new export markets for U.S. farm products.
On December 17, 2018, the USDA announced that President Trump had authorized the second round of MFP payments to be made. These payment were to be issued based upon the remaining 50 percent of total production, multiplied by the MFP rates for the commodity. Many of these payments unexpectedly hit mailboxes by year-end, triggering 2018 tax liability for their receipt. MFP payments are subject to federal income tax and self-employment tax. For cash method farmers, they are taxable in the year of receipt. There is no income deferral available.
Producers who have already submitted an MFP application, completed harvest, and certified their 2018 production do not have to do anything else. The second payment will simply issue if it hasn’t already. For producers who have not yet enrolled, the deadline is January 15, 2019, to apply for inclusion in the MFP program. Producers must file an application by this date, but they have until May 1, 2019, to certify 2018 production. More information and instructions for sign-up are available at www.farmers.gov/mfp.
For more information on the MFP program, click here.
6. Final approval granted for $1.51 billion Syngenta settlement.
On December 7, 2018, Judge Lungstrum granted final approval in the $1.51 billion Syngenta settlement pending in the United States District Court for the District of Kansas. The approval authorized $503,333,333.33 in attorney fees to be distributed from the settlement fund. “Reasonable attorney expenses” will be paid separately from the fund.
Eligible producers who filed a claim by October 12, 2018, should receive a payment from the remainder of the fund in 2019. It is estimated that the payments may be made in the second quarter of the year.
For more information on the Syngenta settlement, click here.
7. Ag nuisance verdicts worry producers.
In 2018, three nuisance lawsuit verdicts rendered by North Carolina juries rocked the agricultural sector. The sum of the verdicts against Murphy-Brown, a subsidiary of Smithfield Foods, exceeded $500 million. Murphy-Brown has filed a notice of appeal to the United States Court of Appeals for the Fourth Circuit. In December, a fourth jury rendered a verdict in favor of eight plaintiffs, but the award was much more modest: $100,000 in compensatory damages and no punitive damages. Approximately two dozen cases remain to be tried in North Carolina. A new right to farm law passed by the North Carolina legislature in 2018 does not apply to these pending cases. These cases involve more than 500 plaintiffs alleging that the use and enjoyment of their property was impaired by the defendant’s open-air hog manure lagoons and other practices.
For more information on the North Carolina cases, click here. We will continue to monitor developments as they unfold.
8. Changes to Affordable Care Act increase uncertainty regarding health care choices.
Is the ACA Unconstitutional?
The Tax Cuts and Jobs Act modified IRC § 5000A(c) to set the individual shared responsibility payment to 0 for months beginning after December 31, 2018. This means that, beginning in 2019, individuals will no longer be subject to a penalty tax when they do not have Affordable Care Act (ACA) compliant health insurance. Because so many taxpayers already avoided the penalty because of affordability, hardship, religious, and other exemptions, the actual impact this change will have on the healthcare market is unclear.
But one court recently ruled that the ACA itself is void in light of this change. On December 14, 2018, United States District Court Judge Reed O’Connor ruled that when Congress set the individual shared responsibility payment to zero, it invalidated the Affordable Care Act in its entirety. Texas v. United States, No. 4:18-cv-00167-O (N.D. Tex. Dec. 14, 2018).
The court based its decision on Nat’l Fed’n of Indep. Businesses v. Sebelius (NFIB), 567 U.S. 519 (2012), in which the U.S. Supreme Court upheld the constitutionality of the individual mandate. The Supreme Court ruled in NFIB that while the individual mandate would not be a constitutional exercise of Congressional power under the Interstate Commerce Clause, it was constitutional under Congress’s Tax Power because the associated individual shared responsibility payment was a tax. In the recent case, the Texas court reasoned that if the individual shared responsibility payment is zero, there is no tax. As if there is no tax, there is no constitutional source of power for the individual mandate, which continues to direct individuals to purchase health insurance, even in the absence of a monetary penalty. The Texas court went on to find that the unconstitutional individual mandate is inseverable from the ACA as a whole because Congress clearly stated that the mandate was “essential” to the law. Because rewriting the ACA without the essential mandate is beyond the power of a court, the Texas court ruled that the remaining provisions of the ACA were thus invalid.
On December 30, 2018, the Texas court issued an order staying its judgment pending resolution of appeals. The court agreed that immediately implementing the judgment declaring the ACA void could cause chaos for patients, providers, insurance carriers, and federal and state governments. This means the ACA will continue in full force unless and until a final appellate decision upholds the Texas court’s judgment. In issuing the stay, the court stated that the Fifth Circuit was unlikely to disagree with its judgment
Health Coverage Difficulties Remain
In the meantime, healthcare difficulties continue to plague many agricultural producers. Most are not eligible for group health care coverage. They must purchase coverage on the individual market, which in most states is limited to the options available on www.healthcare.gov. For those with incomes at or below 400% of the federal poverty limit, the price of these policies are generally offset by advance premium tax credits (APTC). For those with incomes above 400%, however, premiums on the individual Marketplace are often unaffordable. The Iowa Insurance Division, has estimated that 26,000 Iowans were priced out of coverage in 2018. For example, in Iowa a farm couple, aged 55, earning $67,000 a year faced insurance premiums of $32,700 in 2018. 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 in 2018. The numbers for 2019 are very similar, with older married couples with income above $66,000 facing premiums for a silver plan in excess of $40,000.
Producers who receive APTCs to pay for Marketplace insurance must be aware that if income exceeds 400 percent of the federal poverty limit by year end, the law requires the taxpayer to pay back the entire premium tax credit. It is calculated on Form 8962, and assessed as additional tax liability. Those who sell assets to pay debt can easily fall into this trap. If the farmer enrolled in insurance expecting taxable income of $45,000, but ends the year with $49,000 in income, the APTC that must be repaid can climb into the thousands. Many who receive the APTC do not understand the associated risks. A recent tax court case affirmed that there is no equitable relief available, even under sympathetic circumstances. In that case, the widow’s income climbed above 400 percent of the federal poverty limit because she and her husband sold family heirlooms to pay medical expenses while her husband suffered terminal cancer. The court found that the credit had to be repaid. The case was O'Connor, et al. v. Commissioner, No. 3794-16S, T.C. Summ. Op. 2018-48 (Oct. 4, 2018).
For more information, click here.
9. EPA extends dicamba registration for two years.
On October 31, 2018, the U.S. Environmental Protection Agency (EPA) announced that it was extending the registration of dicamba for two years for “over-the-top” use to control weeds in fields for cotton and soybean plants genetically engineered to resist dicamba. The registration extension is in place until December 20, 2020. In taking this step, the EPA placed additional restrictions on the product:
- Only certified applicators may apply dicamba over the top (those working under the supervision of a certified applicator may no longer make applications)
- Prohibiting over-the-top application of dicamba on soybeans 45 days after planting and cotton 60 days after planting
- For cotton, limiting the number of over-the-top applications from 4 to 2 (soybeans remain at 2 OTT applications)
- Applications will be allowed only from 1 hour after sunrise to 2 hours before sunset
- In counties where endangered species may exist, the downwind buffer will remain at 110 feet and there will be a new 57-foot buffer around the other sides of the field (the 110-foot downwind buffer applies to all applications, not just in counties where endangered species may exist)
- Clarifying the training period for 2019 and beyond, ensuring consistency across all three products
- Enhancing tank clean out instructions for the entire system
- Enhancing labels to improve applicator awareness on the impact of low pH’s on the potential volatility of dicamba
- Label clean up and consistency to improve compliance and enforceability
The impact these modifications will have on dicamba injury remains to be seen. ISU’s Integrated Crop Management team has reported that 57 dicamba-related complaints were made to the Iowa Department of Agriculture and Land Stewardship (IDALS) in 2018. This compares to 117 in 2017. To date, Iowa has not implemented more restrictive measures on dicamba usage than those required by the EPA.
For more information on this issue, including a link to the In Re: Dicamba Herbicides Litigation, click here.
10. Farms are officially exempt from animal waste air emissions reporting, again.
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 (Comprehensive Environmental Response, Compensation and Liability Act) and EPCRA (Emergency Planning and Community Right-to-Know Act) 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 EPA has characterized as costly and burdensome. The court delayed enforcement of its mandate by issuing several orders providing extra time to allow EPA to write new guidance. Then on March 23, 2018, President Trump signed the Consolidated Appropriations Act, 2018, into law. Title XI of this Act, the “Fair Agricultural Reporting Method Act” (“FARM Act”) exempts the reporting of “air emissions from animal waste at a farm” under CERCLA. EPA issued a final rule on August 1, 2018, incorporating these changes.
On November 14, 2018, EPA published a proposed rule to amend the emergency release notification regulations under EPCRA. This amendment proposes to add a reporting exemption for air emissions from animal waste at farms. With CERCLA reporting requirements eliminated for animal wastes at farms, it is the EPA position that EPCRA reporting is no longer required unless a release:
- Is not a federally permitted release as defined in section 101(10) of CERCLA,
- Is in an amount in excess of the reportable quantity as determined by EPA, and
- Occurs in a manner that would require notification under section 103(a) of CERCLA.
Stay tuned for 2019!