Pro-Ag CALT Legal Update:
Fall 2010
Erin C. Herbold
Staff Attorney
ISU Center for Agricultural Law and Taxation
Presented at Pro-Ag Meeting- Fort Dodge, Iowa; Nov.
10, 2010
Our website
• www.calt.iastate.edu
• 515-294-6365
• eherbold@iastate.edu
Handling wet grain…
• IDALS has issued a press release and Q & A
fact sheet regarding flood-damaged grain
• Keep flood-impacted grain separate
• Iowa Code 198.7 deals with adulterated grain
• Grain used for commercial feed is adulterated
if it bears of contains poisons, pesticides,
additives that are injurious to health
• Two areas of concern (mycotoxins and
pathogenic bacteria)
Damaged Grain
• IDALS reviewed the publication on our
website.
• If grain is not contaminated, can be used in
animal feed- IDALS
• FDA and CVM issuing letter on the process
• Will be posted on website when it comes out
• Update: There will be no letter, follow above
protocol
Tax
• Health Care Tax Article New and Improved 
• BAPCPA Does Not Apply to Post-Petition Claims- 9th
Circuit rejected the holding of Knudsen case. Holds
that taxes arising post-petition remain entitled to
priority treatment.
• IRS announces tax relief for select Iowa Counties for
June flooding and tornadoes- Look to website for list.
Disaster declaration allows IRS to postpone specified
filing deadlines for taxpayers that reside or operate a
business in these counties.
• Does not apply to recent Central Iowa flooding. IRS
may issue relief for this area in future
Tax
• Banking Bill with tax provisions signed into
law
• http://www.calt.iastate.edu/taxbill.html
• TARP like bailout of banking system, to give
incentives to lend to small businesses
• Creates small business lending fundauthorizes U.S. Treasury to make up to $30
billion in credit available to small community
banks at various interest rates
Banking Bill
• Bonus Depreciation: Act renews bonus depreciation for
2010 (2011 for certain long-lived assets) retroactive to
Jan. 1, 2010 at the 50% level. To be eligible, qualified
property must be purchased and placed in service
before Jan. 1, 2011.
• Expense Method Depreciations: Raises expense method
limit to $500,000 for tax years beginning in 2010 and
2011 and changes phase out from $800,000 to
$2,000,000. Without legislation, method limit drops to
$25,000 for tax years after 2011- Certain real property
may be eligible up to $250,000.
Banking Bill
• Health Insurance Deduction: Beginning in 2010 taxpayers
with self-employment tax can reduce self-employment
income by their deductible self-employed health insurance
• Expanded 1099 reporting: Act subjects taxpayers that
receive rental income from real estate to file information
returns just like taxpayers that are engaged in a trade or
business
• $600 or more, there are some exceptions
• Taxpayers with land enrolled in CRP will have to file
information returns for payments made to farmers who, for
example, provide mid-contract maintenance services on
land worth $600 or more.
FSA Adjusted Gross Income
• Verification Process
– 2008 Farm Bill implemented new AGI qualifications for some
programs (notably ACRE and direct payments)
– Limits: $500,000 for non-farm average AGI; $750,000 for farm
AGI, and $1 million for non-farm AGI for Cons. Programs
– Producers required to declare AGI on Form CCC-926 with FSAproducer agrees to provide additional info to FSA to assist in
verifying income
– USDA and IRS recently announced joint program for
verification purposes, intended to strengthen integrity of FSA
programs and reduce fraud
– Beginning of 2010, producers must complete consent forms
CCC-927 for individuals and CCC-928 for entities
– Supposed to be sent directly to IRS by June 15, 2010
The problem
• This fall, FSA offices received lists of people who
didn’t send in consent forms
• Believed that it is not producer’s faults, its just that IRS
is not familiar with how to process the forms
• Problem: producers who don’t submit consent forms
will become ineligible for future payments and could be
required to pay back all 2009 payments
• If you have this problem, get 3rd party verification from
an accountant or attorney
• Will this function in a workable manner?
Round-Up Ready Alfalfa Issue
• U.S. Supreme Court reverses-injunction against Monsanto’s RoundUp Ready Alfalfa should not have been entered
– 9th Cir. COA’s issued a temporary ban on genetically modified alfalfa
– Key issues- whether producers of organic alfalfa seeds are exempt from
being required to show a likelihood of irreparable harm to get an
injunction under the National Environmental Policy Act (NEPA)
– Should there be a nation-wide injunction based on a remote possibility
of irreparable harm?
– S.C. says no
– Justice Scalia, “This isn’t the contamination of the New York City
water supply. It’s the creation of plants of genetically engineered
alfalfa… doesn’t even destroy current plantings of non-genetically
engineered alfalfa. This isn’t the end of the world.”
Update on VeraSun
• Sept. 30, attorneys for New York law firms
notified corn producers that they withdraw
demands for preference claims in the bankruptcy
proceeding
• “Sufficient information” to determine that the
VeraSun estate will not pursue relief against corn
producers
• Letter with names to be released “soon”
• Withdraw claims against “normal preference
defendants”
How do we respond in the wake of
VeraSun?
• Keep all information regarding grain sales (and
livestock sales- remember Agriprocessors)
• Keep any contracts
• Read any contracts
• Suspect of premium payments?
• What is the fall-out for elevators?
• Make sure to ask questions
• Be familiar with protecting yourself through ag
liens
Livestock Production Legal Issues
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Landlords’s Lien
Ag Supply Dealer’s Lien
Harvester’s Lien
Custom Cattle Feedlot Lien
Commodity Production Lien
Lien for Services of Animals
Veterinarian’s Lien
Perfecting an Ag Lien
• Iowa Code requires filing to perfect
• If secured party assigns a perfected security
interest or ag lien, a filing under this Article is
not required- perfected status continues
• Maintaining an ag lien- Farm products are
located in jurisdiction, then local law of that
jurisdiction governs. If not, then go to that
state to perfect.
Priority
• Generally, priority dates from the earlier of
time a filing covering the collateral is first
made or the security interest is perfected.
• However, statute may say otherwise.
Landlord’s Lien
• Most common Ag Lien in Iowa
• Must file!
• Lien continues for one year after rent is due or six
months after end of lease, whichever is earlier
• Lien must state that it is filed with purpose of
perfecting landlord’s lien
• Lien must be perfected when tenant takes
possession or within 20 days after tenant takes
possession
• Probably need to file every year- safest
Custom Cattle Feedlot Lien and
Commodity Production Contract
Lien
• Lien is effective when livestock arrive at the
farm
• Must perfect Custom Cattle Feedlot lien within
20 days, Comm. Prod. Contract Lien within 45
days or 180 for continuous arrival
Ag Supply Dealer’s Lien
• Guidance on Iowa Ag Supply Dealer’s Lien
– Consensus is that the courts are split on the issue of
priority- Consensus is no consensus
– Will the Iowa Supreme Court address the issue?
– This lien is effective when the farmer purchases the ag
supply, perfected if filed within 31 days after date of
purchase
– Lien on crops produced and livestock consuming feed
– Issue centers around whether a certified letter needs to
be issued for lien on livestock feed. Courts are split.
Death (for the moment) of the
Federal Estate Tax?
• Congress has failed in its attempts to extend
FET for deaths in 2010. No new legislation for
2010
• What does that mean? Revert back to $1
million exemption
Law governing deaths in 2010
• Modified Carryover Basis, No Estate Tax
• Property’s basis (if sold in 2010) is the lesser of the
decedent’s adjusted basis in the property or the property’s
fair market value at the time of death
• No basis step-up allowed
• Two exceptions:
– 1. Executor can increase basis by $3 million for assets passing to
surviving spouse
– 2. Allocate an additional $1.3 million of aggregate basis to other
assets
What does this mean? Heirs would have to pay capital gain tax on
excess amounts not covered by the basis increase rules. But, cap
gains rates are lower this year.
Federal Estate Tax: My best
guess…
• Divide into three windows:
– Pre-election- little to no chance
– Post-election- lame duck- maybe in the second part
of lame duck session
– After first of year- retroactive legislation
What planning steps need to be
taken?
• Inform clients that have not had estate plans
reviewed to get into their attorney’s office.
• Even if reviewed, if they are bumping up
against $1 million exclusion amount, perhaps
have a codicil drafted. Or new wills or trusts…
• Drafts of Legislation
• Grassley’s Senate Floor Speech (Sept.) –
Watch on C-Span
New Case Law
• Minnesota Swampbuster Case Goes Against Farmer
– Swampbuster resulted out of the conservation compliance
provisions of the 1985 Farm Bill
– Wetlands- have the presence of hydric soil
– If drained before Dec. 23, 1985, it is a “farmed wetland”only original drainage can be maintained (prior converted
wetland)
– Here, MN farmer disputed that he violated Swampbuster by
“filling” a two-acre wetland. Farmer exceeded scope of
original drainage
– Presence of undecomposed stalks in top-soil, indicated a
filling of a wetland area- changed the size and scope
Another wetlands case
• Florida District Court issued an order blocking an
attempt by US COE to expand its powers over prior
converted wetlands under the Clean Water Act
– This court invalidated the COE’s adoption of the Stockton
Rules because they improperly expanded the COE’s
authority.
– Here, dry lands maintained by using continuous pumping
– What is NRCS and Army Corps of Engineers stand on prior
converted wetlands? What is use of land?
– Problem- the plaintiff was operating a renewable energy
plant, land no longer being used for farming purposes
– Court sides with power company- COE went outside of
their authority.
New Case Law
• Kansas cases- involving habendum clause on
oil and gas lease
– Frequently utilized in deeds that transfer
ownership interests in real estate
– Question: whether without express language to the
contrary the continuing payment to property
owners of an annual minimum royalty that was not
derived from actual production of oil and gas
extends the lease into the secondary term
– No, the lease terminated
New Kansas Case
• Partition case (implications for wind energy)
– “interested parties” are not always entitled to notice
– Partition is an action that divides up a co-tenancy into
separate portions (co-tenants who own undivided
portions)
– Case involved sub-surface and surface rights- more
common on Kansas, Oklahoma, Texas
– Kansas Supreme Court – all parties are not necessary
to a partition action; only the parties who stand to be
adversely affected are entitled to notification
IRS gets “beat” by Common-law
Marriage
• New Kansas case
• Minority of states recognize common-law
marriage (not enough to simply live together for a
certain amount of time)
• Must hold yourselves out to the public as married
persons, have the capacity to marry
• Kansas courts: Facts: “Husband” dies, she claims
they were married for 20 years- should be exempt
from FET and Kansas Inheritance Tax
• KDR and IRS do not agree
Common-law marriage
• Court examines affidavit of “uncontroverted facts”
• Not enough evidence to establish the marriage at trial
court level
• Appellate court says there was
• Later tax refund action in federal court- court’s
unimpressed with “widow’s” arguments- relationship
was concealed from family and friends- denies refund.
• Later jury trial- jury determines common-law marriage
existed.
• IRS claimed she owed $1.4 million in estate tax,
another $1 million for fraud and interest on top of thatIf
jury’s decision holds, she won’t have to pay
Iowa Case
• Assignment of income doctrine nabs Iowa farmer
– Income taxed to party that earns it
– However, when ongoing business changes form, income may end up
being reported by wrong taxpayer (common in farming and livestock
operations)
– Example: when sole proprietorship incorporates, farmer may have
incurred expenses for putting in crop and then have income from the
sale post-incorporation
– If income reported as corporate income, could end up being taxed at
lower corporate rates and minimize SE tax. IRS may challenge. Thus,
IRS may use the assignment of income doctrine to fight farmer
– Doctrine provides that taxpayer can’t escape tax liability for income
taxpayer earned by transferring income to another entity
– Doctrine utilized against farm couple here
Assignment of Income Doctrine
• Facts: Farm family had sole proprietorship corn
and soybean farm; after crop is put in ground,
they incorporate. Essentially, nothing was
transferred to the corp. After incorporation,
balance of government payments is transferred to
corporate account. Income earned before transfer,
thus IRS argues that its not corporate income
• Outcome: Farmers taxed at personal level and
assessed accuracy-related penalty
Wind Energy Update
• Wind Power Stations must pay millions for not
meeting minimum generation requirements
– Failure to deliver sufficient electricity to the grid
– Increase in nuisance suits
Iowa Appellate Cases Fall 20092010 (p. 35)
• Dillenburg v. Campbell (Iowa Ct. App. Mar. 10,
2010)
• Farm Lease: Death of Landlord and Option to
Purchase by Tenants
• Deals with Iowa Code Section 633.304 notice of
will probate
• Executor must notify those people they know
have claims against property by mail
• Children failed to give notice to “reasonably
ascertainable claimant”
Gaede v. Stansberry (Iowa 2010)
• (P. 36) Recovery of Attorney’s Fees for Defending Title
to Property
– Typically fees incurred defending title to property are
awarded if “necessary and reasonable”
– Trial court ordered sellers to pay damages for removal of
retaining wall, loss of property to city, costs incurred in
defending title
– Iowa COA’s agreed
– Supreme Court invalidated damages award for attorney’s
fees
– Holding: Buyer who must defend title to property may not
recover expenses of that defense unless buyer has given
seller notice of title challenge and opportunity to defend
Allamakee County v. Schaumberg
Living Trust (ICOA, Feb. 24, 2010)
• P. 37- Constitutionality of Subdivision Zoning
Ordinance
• Under Iowa Code Ch. 335, Iowa counties have
authority to adopt zoning regs for land and
structures in county, but not within city limits
• Ordinance contained proper definitions
• Ordinance not unconstitutionally vague
• Common understanding or practice
• Land subject to ordinance
Cooper v. Iowa Realty, Co. (ICOA,
Feb. 24, 2010)
• P. 38-Fiduciary Duty of Real Estate Agent
– Does real estate agent owe seller notice of buyer’s financial
situation?
– The buyers moved out of the home and the seller subsequently
had the first home foreclosed on and defaulted in her payments
for the second home. The seller filed suit against the real estate
agent, claiming that the agent had breached her fiduciary duty by
not disclosing the buyers’ financial situation.
– Trial court found that the real estate agent did not owe any duty
to the seller, and that the buyer’s finances were confidential. The
court determined that if a fiduciary duty was present, the seller
had waived it by accepting payments from the buyers. The seller
appealed.
– On appeal, the appellate court affirmed.
Kersey v. Babich (ICOA, Feb. 10,
2010)
• P. 40- Driveway Easement Construed
– Appellate court reiterated that overarching goal of
contract interpretation (easement is real estate
contract) is to determine intent of parties at the
time they entered contract
– Court agreed that height and width requirements
set by trial court were sufficient and consistent
with driveways prior use
Guthrie v. Jones (ICOA, Feb. 10,
2010)
• P. 40-41- No Boundary by Acquiescence
– Battle over proper location of boundary line
– Both trial court and appellate court reached same
conclusion- no consent to use shrub line as
boundary
– No boundary by acquiescence
Mitchell v. Holliday (ICOA Dec. 30,
2009)
• P. 43- Plaintiff barred from bringing suit
– Plaintiffs participated in conspiracy to defraud a
bank by entering into farm leases that were never
disclosed to the bank- below market value leases
– In pari delicto doctrine- Plaintiffs’ recovery barred
where illegal or fraudulent conduct or plaintiff was
equally or more culpable than defendant
– Also, issue preclusion
In re Estate of Battle (ICOA Dec.
17, 2009)
• P. 45- Homestead Mortgage Issues
– Subsequent Marriage and refinancing
– Mortgage void without signature of both spouses
even if it was a refinance of a mortgage taken out
prior to marriage
– Homestead rights jealously guarded
Lynch v. Lennon (ICOA Nov. 12,
2009)
• P. 47- Another fenceline boundary dispute
• “Mere discrepancy in the amount of land
conveyed by deed is not, in itself, sufficient to
constitute a breach of warranty of title.”
• However, fence was openly placed, obvious,
accepted as boundary, no breach of title and no
recovery for alleged loss of land.
• Attorney’s fees awarded
Van Sickle Construction v.
Wachovia (Iowa 2010)
• P. 49- Mortgage company negligent, but not
deceitful in failure to transfer truck titles
• Iowa Code Section 321.45(3) requires every seller
of motor vehicle to transfer title in commercially
reasonable time
• What was reasonable here?
• Claims of fraudulent and negligent
misrepresentation, punitive damages
• Buyer awarded damages only for his economic
loss
Jensen v. City Council of
Cambridge (ICOA Jun. 16, 2010)
• P. 50- Noxious weeds
– Organic garden not exempt from mowing
ordinance
– City and counties attempt to eradicate noxious
weeds
– What constitutes a conservation area?
– Unconstitutionally vague? No
– Statute’s meaning was fairly ascertainable
– Conservation area must be compatible with the
environment
Roger’s organic home garden- How
will the City of Ankeny deal with
this?
Cases from other state and federal
jurisdictions…
• Scheele v. Dustin (Sup. Ct. Vt. 2010)
– Noneconomic damages were not allowed for
intentional killing of family pet
Scheele v. Dustin
• Intentional infliction of emotional distress or
loss of companionship for intentional killing of
family pets?
– Not in Vermont
– Court adhered to longstanding precedent
– Pets are personal property of their owners
– Some states (Hawaii and Florida) do allow these
claims
– Pet owners could have gone after punitive
damages, but dropped claim at trial court level
To get prior image out of your
head…
U.S. v. Andrus
• P. 53- Court finds violation of MBTA for
“Baiting” birds
– MBTA is strict liability statute- liability imposed
regardless of intent
– Act prohibits “taking” of migratory birds by the
aid of “baiting”
– Milo planted, harvested by use of stripper headercourt found that this was not an acceptable ag
practice
– Guilty of violating MBTA
Stenehjem v. Crossland (N.D. Sup.
Ct. May 13, 2010)
• P. 55- Anti-corporate farming law violation
– Corporation’s acquisition of farmland to protect
waterfowl violates statute
– Statutory prohibition against corporations
engaging in farming
– Farming and ranching defined broadly
– Exception for family held farm and ranch
operations with 15 or fewer shareholders
– Entire tract violated statute- court should not have
to engage in piecemeal analysis
LDT Keller Farms v. Holmes
Livestock (U.S. Dist. Ct. N.D. Ind.
Jun. 25, 2010)
• What constitutes defamation to business?
– Ohio dairy farmers sue livestock company alleging
they knowingly sold them 284 freemartins, seller
countered that cows sold as-is
– Litigation continued- ad placed seeking dairymen who
bought replacement heifers that turned out to be
freemartins from seller
– Defamation- did this injure reputation or diminish
confidence, good will?
• Party alleging defamatory conduct must prove publication
with defamatory imputation with malice and prove damages
• Truth is an absolute defense to a defamation claim
• Trial
Terry v. Sperry (Ohio Ct. App., Mar.
23, 2010)
• P. 61- Winery found to be in violation of
zoning regulation
– What is agricultural and what is commercial?
• Property owners use of property was properly enjoined
because they did not obtain correct permits
• Plant vines and not begin processing activities until
primary source of grapes for processing and marketing
is from on-site production
EDM Corp. v. Hastings State Bank
• Court says security interest seriously
misleading even though filed financing
statement contained debtor’s correct name
– How do you file an effective financing statement?
– Neb. Court ruled that bank’s lien not properly filed
– Look to debtor’s official name on record
– Search logic regulations
– Strict compliance with requirements of revised Art.
9
New Iowa Legislation
• HR 2380 Tenant’s Right to Above Ground Crop Residue
• Corn Stover
• Creates Iowa Code § 562.5A. In a farm tenancy, the tenant
has the right to take part of a harvested crop’s aboveground
plant, such as corn stover and other crop residue.
• Tenant may take aboveground residue at the time of harvest
or after harvest, until the termination of tenancy.
• It is important to remember that if the landlord and tenant
specify another use or non use for the residue, in writing,
then the writing will trump this new code section.
Thank you!
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Questions? Issues?
Erin Herbold
Staff Attorney
ISU Center for Ag Law and Tax
www.calt.iastate.edu
515-294-6365
eherbold@iastate.edu
If you are in Ames, stop by 