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Most operations need access to capital to make their operations work and banks generally provide that access. In order to get access to those funds, the banks generally require the operator to give a security interest in the results of the operation (the products), land, and /or equipment, or commodities. This is called giving a security interest or a secured transaction. Simply saying you can take my stuff if I don’t pay isn’t enough. Steps and procedures have to be followed. The first step is connecting the pledged property to the promise to pay via a pledge or attachment. After that, the lender perfects its interest in the attached property by filing with the recorder’s office or Secretary of State or wherever the rules say they should file for the type of property they are attaching to. Usually, this is done with a financing statement, but with title vehicles it means placing a lien on the title and with real estate it means putting a mortgage on the property.

The reason lenders follow these steps is to make sure they are the right place or priority as to who gets paid when the pledged item is sold. The Talladega Nights motto of “if you are not first you are last” isn’t quite right as sometimes, the difference between being second or third priority is the difference between being paid and being left holding an empty promise. Generally, the first to file wins the priority race, with some exceptions.

The two that impact ag the most are purchase money security Interest (PMSI) and Ag Liens.

PMSI changes the first to file wins concept. A PMSI lets the lender jump the line to “super-priority” over other parties claiming an interest in the same collateral covered by the PMSI. Super-priority means the creditor with a PMSI will have first priority over third parties, even when these third parties perfected their interests before the creditor gained the PMSI. In order to be a PMSI, the lender has to give the money to purchase the item and follow the steps to perfect that interest in that item. Example, the local banker lends the operation money to put in the crop and receives a pledge of all farm products and equipment. The operation buys a new tractor mid-year and finances it through the dealership. The dealership’s lending will be first over the local bank as to the tractor it lent money for if it follows the rules to secure the PMSI financing. The PMSI rules require filing within 20 days of the operation taking possession (when it is physically received)

PMSI in livestock is another critter altogether. It requires additional steps, to include actual notice to the local lender who might otherwise be in front of the PMSI lender. The PMSI has to be filed BEFORE the delivery of the livestock. If an operation has a choice on equipment or livestock PMSI financing, the lender is probably doing less to secure its position with equipment PMSI lending.

Ag liens are state rules that trump the normal pecking order of payment. Vet liens, custom harvest and feeding liens and even repair shops that hold onto repaired equipment each have different rules on how to prefect their lien.

As a potential buyer of equipment at a private sale, the operation should do a lien search on the name of the seller (which needs to be searched exactly how the driver’s license appears) and a release should be obtained from any lender that has filed a financing statement. If the operation sees a financing statement that is valid and still wants to purchase the equipment, it should talk to the lender about what it will take to release the specific item being purchased. Oral statement that “my banker doesn’t care” and “I am good for it” are sure ways to line the pockets of your lawyer when the bank comes to take the property that you already paid the seller for once.

So, things are different and better now that it is 2021, right? More like just different, not any better or any worse than the year prior. The sun will still set too early when you need that extra time to finish and the wind will still blow harder than you like when you are outside. Somethings, like the government present the same old problems but in new packages.

Many eyes in ag are fixated on what possible changes are coming down the pike with the new administration in the federal government. Signals indicate the COVID 19 response is going to be the center stage well before environmental changes, tax changes, or foreign policy changes take the spotlight.

Many are concerned about a tax increase. The current plans proffered by the incoming administration, which have to be adopted by a razor thin margin in both chambers of the legislative branch are focused on income earners who net more than $400,000 per year. Key tax provisions are scheduled to expire or phase out in the coming years, to include 100% bonus depreciation, the current tax brackets, the increased standard deduction, childcare credits, the limitation of itemization deductions, and the QBI deduction for non-corporate taxpayers. Additionally, the high estate exemption (Currently at 11.7 million per person) is also slated to sunset by 2025. Look for potential deals on these items in standalone legislation or in part of other legislative packages to pay for infrastructure or environmental programs. The incoming Secretary of the Treasury, former fed chief Janet Yellin, is likely to push the administration to delay any sweeping tax reforms resulting in increases until the economy has its feet back underneath it.

Environmental legislation is highly likely. The positioning of Tom Vilsack as Sec of Ag is a win for farmers as is the continuation of Debbie Stabenow as Senate Ag Committee chair. She has a reputation for fighting for farm operators, which may help farmers actually benefit from proposed carbon sequestering programs as opposed to the ever-growing list of “middleman” carbon credit traders, brokers, and aggregators that look to, as merchants time eternal have done, take a skim on the payment to make the system work. Details about mandatory or voluntary and credit for existing practices are simply not available.

The farm bill hearings for the next farm bill this year are likely to be broad, fact finding type hearings, but the real fight comes after the 2022 midterm elections before the 2023 Farm Bill. It is of note that Collin Peterson of Minnesota was defeated and a longtime ally of production ag is gone from the house Ag committee. With Biden only carrying 16 percent of counties of the US (which is useful to see that his voter base is urban and urban adjacent), a push for even more of the Farm Bill (which is 90% food related) to go to urban food priorities may be coming.

Shorts:
The IRS won a tax court case confirming that the executor and the beneficiary of an estate are both responsible for unpaid estate taxes

Remember that rental property idea you have has some limits. If you lose more than $25,000 on your rental project, that loss is limited. If you make over $100K but less than $150K you have a sliding scale down from that $25,000 in what your limits are and if you are over $150,000 in earnings after some technical adjustments, you cannot take a rental loss.

If you got a letter from the IRS saying you owe money, look for the Barcode on the letter. With a QR reader on a smart phone, you can use the reader to get directly to the IRS’s claims resolution website.

Is it Duck Season or Rabbit Season? Much like Elmer Fudd and Daffy Duck, Iowa’s hunters are subject to Bug Bunny rules on who can hunt and fish and when. Don’t worry, this scheme goes way back to England. When people hunted the “King’s Forrest” and were subject to the Kings rules on who could take what when. Why we don’t east swan’s (which are apparently tasty) goes back to England’s crown requiring a high fee to harvest one by buying a mark or brand to put on the Swan. Government toadies floated the waters and decide what hatched swans got what brands. In fact, today unmarked swans are still the property of the Queen. So, the critters belong to the sovereign until they let you harvest them. Remember the golden rule, those who have the gold write the rules. This ownership principle was confirmed in Iowa in 2013 when the court ruled our legislature has confirmed via is passed laws and regulations that owning land does not create the right to hunt the land largely because the State, not landowner owns the wildlife on the owner’s property. (Until it doesn’t, when it goes through your windshield, but I digress). Also, fishing is a bit different in that under Iowa law, private ponds can be fished by the owner or tenant and their minor children without license but everybody else needs to pay for privilege.

Conversely, rules are the price we pay for a civilized society. The concept of the tragedy of the commons, where everybody puts one more critter on a shared pasture show that absent rules, we tend to maximize our own benefits first before society. In animal harvesting, this can lead to zero animals to harvest for anybody due to over hunting and fishing.

All states have regulations regarding the hunting and fishing things by residents and nonresidents, big and small, fury and scaley on state-owned public land as well as privately owned land. The rules and fees favor residents, students and members of the military. Notice residency, not ownership of land dictates the treatment stats. A nonresident landowner has no secure right to hunt their own property, property for which they pay taxes to the state of Iowa. 

A resident landowner can get two free deer hunting licenses - one antlered or any sex deer hunting license and one antlerless deer and they can buy two more antlerless deer hunting licenses. “Owner” is defined as the owner of a farm unit who is a resident of Iowa. A farm unit is not an acreage with some trees, it has to have some farm qualities to it. Nonresident landowners must apply for one of the nonresident antlered deer licenses by zone. The state spreads out 6,000 of these tags over 10 zones in Iowa has just under 10,000 people apply for these licenses. If they can’t get an antler tag, they get preference for the non-antler tag.

Don’t worry, the lawyers have been involved here too. Here is a case from Iowa couple of years back and final resolved out about a year ago in court..

The plaintiff owned ground in Iowa but didn’t live here. He was successful in getting a buck tag 4 out of six years and had to settle for a doe tag the other years and he shelled out the out of state license fees to do so, even though he pays taxes on that Iowa land. He filed a lawsuit asking the court to establish him filed an instate "owner" under for purposes of Iowa deer hunting laws.  He claimed that not treating him as an “owner” violated his inalienable rights and his equal protection rights under the Iowa Constitution. The state did not respond within 60 days and the action was treated as having been denied. Court held that the state has every right to treat out of stater’s differently, regardless of land ownership as a legitimate government interest in wildlife management and called it reasonable, not arbitrary, and appropriate use of the police power.   

Yes, really. You should be contemplating tax consequences right now for the year. You have six weeks left to get your income and expenses, capital purchases and sales tallied and contemplated.

Here are some factors to consider.

ARC/PLC, MFP, CFAP, EIDL Grants, Syngenta payments, Iowa Livestock Producer Relief Fund and the Beginning Farmer Debt Relief Fund payments are all income. Include these payments in gross income (subject to self-employment tax) when compiling income and expenses.

Crop insurance proceeds and federal disaster programs in gross income for the tax year during which they receive the payments. Unless a one-year deferral is triggered for provision for insurance proceeds and disaster payments received for “destruction or damage to crops.” This is to acknowledge those operations that sell the year following harvest. If farm operators are planning to play games by avoiding income this year it may be tricky to “right the ship” in the following years if they lose sight of the plan.

What to do:

Farmers have a number of tools available to help manage their tax liability. Sometimes to many tools and to vigorous use of tax avoidance means pain on the backside when the farmer tries to exit the field for good and finds out the social security benefit is a low number and they owe tax on depreciated items when later sold is a harder thing to plan around than they would like.

Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common techniques are income averaging, prepaying expenses, making contributions to retirement accounts, gifting grain to a charity, carefully timing the purchase or sale of assets, entering into or electing out of deferred payment contracts, and properly managing depreciation and expensing decisions. Farm operators can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. If when filing tax returns for the 2020 year it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. The danger is that the check won’t be good in 2021 when the operator goes to collect.

Saturday, February 27, 2021
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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