Back in 2018, California, which can change the law with a ballot procedure that allows the voters to bypass the legislature and essentially enact whatever, passed a law that prevents farm owners in the state from using confinement systems for veal, bred hogs, or layers that are “cruel”. To not be cruel, the animal must be able to do the Hokey Pokey in the area, that is, the animal must be able to lie down, stand up and turn all the way around and each animal has a minimum square footage required.
Also, it is illegal in California to sell products that are derived from facilities that do not meet the Hokey Pokey test starting 1 Jan 2022. California raises about 4% of the bacon it needs, most of it comes from the Midwest. So essentially, the Californian’s are telling Iowa how to raise hogs, chicken and beef.
Since we are talking about it here, it should be no surprise that it went to court. American Farm Bureau and the National Pork Producers took the lead. They lost. They lost in the appeals court, even though the court acknowledges that the rule will cause changes throughout the nation. This appeals court, the 9th Circuit, is referred to in some legal circles as the 9th Circus, as it has a long history of adopting liberally liberal interpretations of the law to further social agendas.
Back in the dark ages when I went to law school, we read about Wickard, a farmer who was growing wheat in violation of an ordinance enacted by the state. The federal court pointed out that the Constitution says the feds regulate Commerce between states and since wheat makes the flour and people in all states buy flour, the fed gets a say in by making sure that one state doesn’t make an undue burden on the other state residents. This is referred to as the dormant commerce clause. It is a wide-reaching grant of federal authority, but it has always been viewed by the courts as a narrow power.
The court didn’t care that the Hokey Pokey rule, while limited to California Agri business, has an impact on ag business in other states. 87% of all pork is consumed outside of California, but the 13% who now have to have Hokey Pokey approved production raise the price for all. Since it impacts everybody, the court found it okay.
The price increase has restaurant owners simply considering removing pork from the menu, which of course, is the ultimate goal of those who seek to dismantle and eliminate ag production as we currently know it.
This ruling can go up for appeal to the US Supreme court, so it is not over for Bacon in San Francisco, but it doesn’t look great.
Public service reminders
HIPPA means your doctor can’t tell your neighbor about that weird growth on your arm pit or ask about your vaccination status. HIPPA applies to covered entities who get your health information, like doctors, insurance companies and hospitals. It does not cover Aunt Maude asking if you have to continue to take penicillin or if that rash is all cleared up.
Free Speech does not mean you can say whatever you want to say at any time. All rights are subject to other people’s enjoyment of their rights. For example, you cannot yell fire, or we are all going to die in a crowded theatre unless it is factual. Also, certain words are “Fighting words’ and are essentially off limits for expressing yourself. Also, certain images are pornographic and not artistic. In the words of a Supreme Court justice “I will know it when I see it.”. So, we do have limits on our conduct as part of our social compact with one another.
It has been tested recently in court and private companies can ask their employees to be vaccinated against whatever they ask them to be, or the employee can and work for a company that doesn’t ask or doesn’t care. If you work for government agency, which government (local, state or federal) will determine what they can and cannot ask you do to continue employment.
The government retains certain rights no matter who is on the deed. In fact, if you look back at an abstract far enough, most of original conveyances came from the United States government via a “patent.”. This document, in Iowa is generally for 40-acre sections signed by Franklin Pierce. In the end, the uncomfortable truth that we don’t always contemplate is that our rights of property ownership are derived from and there for are controlled by, the government. Of course, the government is supposed to be by the people so we are really granting ourselves rights. right??
Here is a look at some of the government powers.
Police Power: Zoning ordinances and building codes that promote the health, safety, or the general welfare of the public. Zoning can be easily defined as the government’s ability to enact regulations to reasonably control land use. It could be an ordinance requiring mowing of grass; in the country it might be soil conservation rules requiring owner to terrace property; statute authorizing destruction of diseased cattle without compensation; ordinance prohibiting ownership of dangerous/vicious animals. Sometimes zoning can’t be enforced so you need to get a variance from a board of adjustment. In Iowa, what was once an easy process is now being tightly construed that in order to get a variance, no other economic value can occur. For example, construction of a pergola less than 30 feet from the curve is something that has been routinely allowed by a board of adjustment, but under Iowa supreme court rulings, not having a pergola isn’t depriving a landowner of all economic use and is therefore not a hardship, so the variance should not be granted. The impact on the surrounding properties also considered. Note, zoning on ag land is pretty limited but the county can stop using the ag designation as a shield to get around rules against subdividing ground int buildable lots in the county for residential use.
Eminent Domain: Eminent Domain provided for in 5th Amendment to the Federal Constitution. It prohibits the government from taking private property for use without just compensation for the owner. The eminent domain clause is also known as a taking’s clause. An explicit taking is the classic example is if a landowner will not voluntarily sell property to the state to build a highway, so the state uses its eminent domain powers to obtain the property and provide the owner with “just compensation.” An implicit taking occurs when the government regulation indirectly causes a result that has the same effect as an explicit taking. An example would be if an owner bought land to develop it, but then shortly later, the government banned new development in that area. The resulting process from eminent domain power is called condemnation.
Taxation: Taxation can affect real estate in two ways the taxes that are assessed against the real estate or other taxes (i.e. income tax, sales tax) that becomes a lien on the property due to the owners’ debt. When real estate taxes remain unpaid, the property can be sold at tax sale.
Escheat: This is the process by which property reverts back to the state (or county) in cases where an owner dies without heirs and without a will or where the property is abandoned. Since the government granted the rights in the first place, they built in a feature to allow them to reclaim the rights granted if nobody else can claim them.
Statutory Interests in Property
Yes, dirt is what is behind your ear and soil is what we grow crops upon. The alliteration of soil is special is catchy but not quite as catchy as dirt is different. We treat landownership and its disposition in estate plans differently than we do cash, the family shoe factory or even the family dog. Understanding how property works is an essential knowledge component for the landowner, the potential heirs or the prospective new buyers. Every state’s property system is different, and this will focus on Iowa’s.
Property ownership is often described as a “bundle of sticks”. I grab a wad of pens to demonstrate each stick. Each of these “sticks” represents an individual right. Sometimes an owner might have the entire bundle of sticks. The occupant usually has most of the sticks. Sometimes, a life tenant might have another one, a mortgage company might have another one, the REC might have one for a power easement, or the city might have another stick due to zoning requirements. Yep, the government retains some rights, like police power, eminent domain, taxation, and reclamation of “dead” properties (when nobody else can claim it, the government makes sure it can).
To keep track of the rights, in Iowa we utilize an abstract & title opinion system. Most of the states and international holdings use a system developed by an Englishmen in Australia, the Torrens system and it is coupled with a title insurance requirement. An abstract of title (a/k/a abstract) is prepared which summarizes any recorded or filed instruments affecting title like mortgages and judgments. It is a history of the property. An abstract can only provide information about recorded instruments as they are shown on their face. Some problems are not revealed from an abstract (i.e., forged signature, seller was incompetent, etc.).
An attorney reviews the abstract and issues a title opinion that states the legal descriptions, the titleholder(s) and any objections (which may be defects to be corrected such as tax liens or may be issues of notice such as presumably acceptable utility easements). It is like a book report on the history. Unlike a title insurance system where defects are routinely insured over, Iowa’s system requires that any defects must be resolved before closing can occur. It is illegal to sell title insurance in Iowa, so the state has a title insurance equivalent (that is far cheaper) to make sure Iowans can get nationally marketed mortgage products.
In Iowa, the government is preparing to fix some problems with matching federal depreciation rules, with taxing of grants that the federal government did not tax as part of Covid relief, and some new rules on PPP loan and Beginning Farmer Tax Credit. Additionally, inheritance tax (tax Iowa imposes on people that inherit property from people that they are not direct descendants) is on its way out the door through a phase out between now and 2025. That is a tax on circumstance, as many times nephews and nieces are the next generation of farm owners and this will remove a financial obstacle for nontraditional farm generational transfers. If you are in line to get Great Aunt Gertie’s 160, feed her vitamins for a couple of more years, it’s worth the investment.
On the fed side, the president is laying out his tax and spending priorities. He has already pushed through a Covid 19 Plan called the American Rescue plan and is now moving towards a significant tax hike to fund physical infrastructure spending (the American Jobs Plan and “human infrastructure” (American Families plan). It might be called the make American Taxed Again plan. A great write up of this is found at the Iowa State Center for Ag Law and Taxation. I will hit the highlights. Note this is separate from the Senator Bernie Sanders introduced 99.5 Percent Act. This proposal would lower the basic exclusion to $3.5 million ($1 million for lifetime gifts) and increase the highest estate tax rate from 40 percent to 65 percent.
The Jobs plan looks to increase corporate tax to 28% (from 21%), imposing tax on corporation book income and funding the IRS to beat the countryside for unpaid taxes or reinterpreted tax returns to generate revenue.
The Families plan calls for 2 years of free community college, free universal preschool (which is reported at 4 years of free education occasionally), universal basic income for parents of children, paid FMLA and additional targeted funds to historically black colleges universities, minority serving institutions and tribal colleges (that is higher education sites that where historically operated to serve minorities), increase Pell Grants, money for teachers. The Plan will pay for these largess distributions by “closing loopholes”, increasing IRS audits and crackdowns and changing how long-term assets are taxed. It would increase capital gains rates (which are currently lower than regular income rates) on those who earn over $1,000,000 (to include the sale of the property in that earning), increase taxes on all income over $400,000, increase the individual rates to the 2017 rates, and tax assets at death as if they were sold, regardless of if the asset is actually sold or not.
Some of the things being considered include the elimination or reduction of the 1031 exchange provision that defer capital gains when selling real estate if you buy another piece of real estate, limiting the use of Net operating loss and making some sort of deferral exemption for “family farms” from the pay at death provisions, and increasing funding for everyone’s favorite government agency, the IRS.
Right now, you pay a tax upon the sale of assets that gain in value if you sell them. This is capital gains. If you hold them for more than 1 year it is a lower rate than if you hold them for less than 1 year. Also, you pay a net investment income tax (NIIT) sales of investment assets at 3.8% if your income is above a certain threshold. The difference between current law and the proposal on the sale of 1000 acre Iowa farm that with $6,525 of gain per acre would be an percent increase of the sales price from 17.6% to 36% of the total sales price. If the owners were not active farmers and had rented the farm out for 10 years, then they would be looking at 43.8% of the sales price going to taxes between state and federal tax.
What about the farm equipment Under current law, the value of the equipment that has been depreciated out on tax schedules is taxed at ordinary income rates when it is sold. That makes sense, you took a deduction when you bought it to make income and then if it has any value left when you sell it, that amount is “recaptured”. Under the new laws, because of the increase in the NIIT, too much equipment sales and or equipment sales the same year as the land sale and it will be taxed at 39.6%. Ouch. Don’t forget to hold the grain until another year or that will also be hit at that high rate.
Property transferred at death receives a step up (or step down if things are bad) basis adjustment equal to the date of death value. It’s been that way since 6 years after we started federal taxing folks. The alternatives are carry over basis (meaning that you inherit the cost that grandpa paid as your basis if you ever sell) or now proposed, tax it like it was sold even if it wasn’t. Same thing for donations, if the donation was worth more when donated, pay tax on it like you sold it.
Currently, a beneficiary receives step up to the date of death. Consider this inheritance, Land – 1,000 acres at $7,200 / acre basis, Machinery – $675,000 basis Corn - $500,000 basis which can be sold without paying capital gains at all by the beneficiary. Under the Families plan, if the beneficiary is not farming, this will trigger 30% tax on the land. If they were able to meet the definition of active family this tax is DEFERRRED, not waived and is payable when the family farm is no longer operating the ground. The plan is silent on the corn and machinery in this example. If this was a gift during the farmers lifetime under the Families plan it is not real clear what happens.
Sumner, Iowa Attorney practicing in Iowa primarily in Ag Law, Bankruptcy, Estate Planning, Real Estate Law. Lawyers at the Dillon Law P.C. are dedicated serving Iowa, including but not limited to the cities of Allison, Charles City, Cresco, Decorah, Des Moines, Dubuque, Elkader, Grundy Center, Independence, Manchester, New Hampton, Waterloo, Waverly, Waukon, West Union & Vinton, and the communities that makeup Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Chickasaw, Clayton, Delaware, Dubuque, Fayette, Floyd, Grundy, Howard, Polk, Winneshiek, counties. © 2021 Dillon Law P.C. Sumner Location | 209 E. 1st Street, Sumner, IA 50674 Volga City Location | 502 Washington St, Volga City, IA, 52077. West Union Location | 103 N. Vine Street, West Union, Iowa 52175 West Union, Iowa 52175 We are there most Fridays 10-3 and by appointment. Telephone: (563) 578-1850 Email: firstname.lastname@example.org Home | Attorneys | Blog | Ag Law | Bankruptcy | Estate Planning | Real Estate Law | Contact | Iowa Ag Law Attorney Sumner Taxation Commercial Transactions Production Contracts Labor Hobby Farm Liability Bremer Fayette County Lawyer