Our Blog

Read the Latest News

To the delight of comedians everywhere the FTC is reportedly looking into why McDonald's ice cream machines often seem to be out of order. At first this seems pretty much like a waste of time, and nothing do with ag law, but it does.

It's because the McDonald's franchisees may be restricted from repairing the machines. The technicians are hard to come by and the four-hour cleaning cycle seems overly complex, but if you can’t even hire somebody other than a previously anointed technician, the market doesn’t work right. That is high prices and less quality. The ice cream machine with a repair restriction is legally the same critter as a yield monitor or a tractor that has the same rules. Imagine the delay when only a factory authorized representative can adjust, or trouble shoot a wonky seed tube sensor.

The concept is that an owner of a piece of equipment has right to repair, and the right would be expanded to require manufacturers publish diagnostic tools and documentation they use to fix repair their goods. This concept has traction in some states out east, where it was on a the ballot in Massachusetts as measure requiring data on cars that manufactures don’t like to make public. In fact, 27 states have kicked around right to repair measures in various formats.

Another concept being pushed is requiring manufacturers to create products that can be easily fix. Consider Apple products and how they are seemingly impossible to access, like the iPods. They have small batteries in them that fail after a number of years and right now, you or a third party that attempts to replace them will void the warranty if you do manage to figure out how to open them up. The other option is to toss them and buy new, which environmental advocates are against.

Who would be against this? The people who build things don’t want their products easily copied and they raise concerns that non authorized non trained people modifying their product makes the product dangerous in some cases.

Ag relies upon tech and this issue is as important to the future of ag as climate change, land use, and taxation.

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.

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.

As government’s continue to spend away, the lucrative pull of changing acres to residential or commercial taxation over ag will continue to draw the eye of the assessors. Having the old grey mare out back is not going to save you on property taxes like it might once have.

Iowa Administrative Code 701.711.1 classifies property into difference categories and leaves it to the county assessor to apply according to its present use. If you don’t like what the property assessor does on classification (or valuation) you need to appeal in between 2 April and 30 April. This appeal is heard by a county board of review. If you don’t like what that board says, you appeal to the property appeals board. You need to make that decision relatively quickly (20 days after the local board adjourns or 20 June, whichever is later.

In a case out of Dallas County, a 25-acre parcel with two machine sheds, a hay field and two draft horses was not enough to get ag real estate taxation. The board looked at the amount of ag activity occurring on the property and the determined it wasn’t for profit. This was despite the testimony that the draft horses might be bred in the future (one was over 20 years old and the other was less than 5). The baseball field on the property also probably didn’t help sell it as ag.

However, a machine shed used in conjunction with a farm operation in a Humboldt county case, was enough to protect the ag definition, even as the surrounding uses around the farm operation became residential. The farm operator’s intent was important. The court found that determining was it a hobby or was it with profit intent to be critical to the classification.

Having an old swaybacked mare out back is probably not enough to enjoy ag classification, the closer you live to an urban area the more likely it will not be enough. To be fair, I have never been a fan of horses. A college roommate of mine once said the horses went out of style when they perfected the internal combustion engine. That might influence me. Now, as they say on social media, don’t “at me”. Other people are more than welcome to admire, care for and espouse the virtues of horses. That is, unless you can show profit motive with detailed records, business plans, and a clear path that you are engaging in ag, not rural living with out of style animals.

Terms that might be helpful

The trust: A trust is an artificial entity, something like a corporation, created by a document or instrument.

A trust requires four basic elements - trustee, trust property, trust document, and known or discernible beneficiaries. The trust document specifies the rules of operation for the trust, the powers of the trustee, the beneficiaries to share in the income and principal from the trust, and instructions for distribution of the trust property.

Trustee: The person “entrusted” with carrying out the trust plan. The trustee can be the grantor, a third party or a corporate entity (like a bank). All have a duty to be responsible and work for the good of the trust’s plan.   Duties include receipt and management of the trust assets, collection of income, accounting, tax reporting and payments, investment and income distributions according to the trust agreement.

Grantor/settlor/Trustor: The person who creates the trust (not the lawyer, the person with the assets”

Beneficiary: The person or entity. who benefits (gets the goods or money) from the trust’s plan. A beneficiary can be the grantor (individual who established the trust), spouse, relatives, friends, churches, and/or charities.

Saturday, July 13, 2024
  • Patrick B. Dillon
  • Jill Dillon
  • Tori Beyer
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 is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill is a firm owner but not currently accepting private pay clients. Jill still has ties to her family farm operation which includes a dairy herd.
Dillon Law PC
Tori is a University of Iowa undergraduate where she double majored in Criminology, Justice, and Law and Ethics and Public Policy and a North Dakota Law School graduate. Tori practices in the Sumner office. Tori's areas of practice include but are not limited to estate planning, wills/probate, criminal defense, and civil litigation.

File Your Federal and State Taxes Online