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VOLUME 24, NUMBER 3, WHOLE NUMBER 280 MARCH 2007

IRS rules that some credit union activities
are taxable
The IRS has issued three Technical Advice Memoranda (TAM) that will certainly shake
up the way credit unions do business. A TAM is issued in response to an IRS agent
request for guidance concerning an audit that the agent is processing.
Credit unions began in the U.S. in the early 1900s. They basically are non-profit
institutions operated as a cooperative that offer financial services such as better

INSIDE interest rates on accounts and loans to its members. The credit union idea is fairly
simple – people should be able to pool their money and make loans to each other. In
1934, the Congress passed legislation that permitted credit unions to be organized
anywhere in the United States. Up until then, only a handful of states had passed
legislation authorizing credit unions, with some of the statutes being unworkable. The
• ACRE case 1934 federal legislation allowed credit unions to incorporate under either state or
federal law, a system of dual chartering that still exists. Presently, about 85 million
• 2007 Farm Bill Americans are credit union members.
State-chartered credit unions were first determined to be exempt from federal
income tax in 1917 by virtue of a U.S. Attorney General Opinion. In 1951, the Congress
• Federal Register enacted Section 501(c)(14)(A) of the Internal Revenue Code (Code), which provided
summary the statutory basis for the tax exemption. Another Code section, however, imposes
a tax on the unrelated business taxable income of tax-exempt organizations – that is,
• State and federal income from activities that are not substantially related to the exercise or perfor-
roundup mance of the organization’s exempt function.
According to IRS rules, income-producing activity is unrelated trade or business
income if it (1) is generated by a trade or business; (2) the trade or business is regularly
Solicitation of articles: All AALA conducted; and (3) the conduct of the trade or business is not substantially related to
members are invited to submit ar- the organization’s exempt purpose or function.
ticles to the Update. Please include In one of the TAMs, IRS reviewed whether six activities of a state-chartered credit
copies of decisions and legislation union were related substantially to its exempt purpose of providing low cost credit for
with the article. To avoid duplica- its members through mutual and non-profit operation. The activities were (1) sale of
tion of effort, please notify the Edi- cancer insurance; (2) members financial services program (MFS); (3) sale of car
tor of your proposed article. warranties; (4) sale of credit life and credit disability insurance; (5) sale of collateral
Cont. on p. 2

Practitioner note on estate tax liens
Concerning the federal estate tax, much of the focus in recent years has been on
whether the Congress will repeal the tax. The U.S. House has passed several “full-
repeal” bills, but the Senate has not gone along. So, for the present time, a great deal
of uncertainty exists in the estate planning realm due to the gradual phase-up in the
federal estate tax exemption, the phase-down in the top federal estate tax rate, the
elimination of the tax in 2010 (along with elimination of complete basis step-up at death),
and the resurrection of the tax in 2011 with only a $1 million exemption and a 55 percent
top rate (but with complete basis step-up).
A federal estate tax issue that largely escapes discussion is how the IRS goes about
collecting the tax–in other words, the collection process. When a taxpayer dies, it can
sometimes take years to settle property disputes. IRS uses the general estate tax lien
(which is not filed anywhere and does not have to be perfected) to protect its interest
in a decedent’s assets while the estate is being settled, and it attaches to all of the
property in the decedent’s gross estate. This general lien is the IRS’ primary estate
tax collection tool, and it arises when an estate does not pay an estate tax liability that
is due and owing. The only property the general estate tax lien does not attach to is
property that is not included in the decedent’s gross estate or assets that are included
in the gross estate, but are expended for court-approved estate expenses.
While less than two percent of all estates owe any federal estate tax upon death,
owners of businesses may have a slightly higher possibility of having a taxable estate
Cont. on page 2

MARCH 2007 AGRICULTURAL LAW UPDATE 1
CREDIT UNION ACTIVITIES/ CONTINUED FROM PAGE 1

protection insurance (CPI); and (6) sale of come generated by such sales. If credit possible that the Congress will at least put
checks. IRS ruled that only the activity unions can do the same thing without pressure on the IRS to soften its stance.
involving the sale of checks was related to paying tax, they would have a competitive Tech. Adv. Memos. 200710017, 200710018
the credit union’s tax-exempt purpose. All advantage across a wide array of finan- and 200710019 (Oct. 20, 2006).
of the other activities were considered to cial services – which are unrelated to their – Roger A. McEowen, Iowa State
be unrelated to the purpose of “promotion tax-exempt purpose. University
of thrift and providing low-cost credit for Keep a sharp eye on this issue. It is
its members.” With respect to the credit
life and disability insurance sales, IRS Estate tax liens/Cont. from page 1
noted that the sales were primarily for the at death. Consequently, the Congress has Editor’s clarification and update on the
purpose of generating income to the credit created special rules for business owners Nebraska corporate-farming ban in-depth
union and some of the employees, and for whose estates (i.e., the business prop- article from last month: The American Ag-
the benefit of the insured rather than for erty) are not able to pay the full amount of ricultural Law Update misprinted the final
the benefit of the credit union member- their estate tax within nine months after sentence of Professor Schutz’s article,
ship. As a result, the credit union will have death. For example, if the primary asset of “Nebraska corporate-farming ban uncon-
to pay “unrelated business income tax” the estate is an interest in a closely-held stitutional: what does “the farm” mean?”
(UBIT) on its income from these activities business, an election can be made to pay It should have read as follows: “Under the
– that is the same as the corporate income the estate tax in installments over 15 years. Eighth Circuit’s view of the dormant com-
tax rate applied under similar rules. When the installment payment election is merce clause, legislators, task-force mem-
The other two rulings added accidental made, the IRS utilizes a special estate tax bers, and anyone lobbying for I-300-like
death and dismemberment insurance, lien (known as an I.R.C. §6324A lien). This legislation would be well-advised to re-
group life and health insurance, and “guar- special lien must generally be filed or frain from using the word “Nebraska”,
anteed auto protection” to the list of tax- perfected to be valid against third parties, and they should ask themselves, “What
able activities. and it is only valid against specific assets does ‘the farm’ mean?’”
The rulings seem to make sense. Banks that the executor and the IRS agree upon. The extra language in the February
and other financial institutions that sell But, here is the unresolved issue– when issue was biographical information. Pro-
similar products must pay tax on the in- the IRS files the special estate tax lien, fessor Schutz grew up on a farm in south-
does that extinguish the general estate central Nebraska. Since that article was
tax lien? The answer to the question is not printed, the Agriculture Committee of the
very clear. The issue has never been Nebraska Legislature held a hearing on
squarely addressed by any court, although LB516. Testimony included support for a
two bankruptcy courts and a federal dis- corporate-farming ban that accommo-
trict court have come close. In a recent dates the structural needs of new opera-
Chief Counsel Advice Memorandum, IRS tors and support for an in-depth task force
stated in a footnote that their position is study of the issue. Opposition testimony
VOL. 24, NO. 3 WHOLE NO. 280 MARCH 2007
AALA Editor..........................Linda Grim McCormick that the general lien “continues to attach included calls for a quicker response than
to all property except the property subject the two-year study mentioned in the bill,
2816 C.R. 163, Alvin, TX 77511
Phone: (281) 388-0155
to the section 6324A [special estate tax] as well as criticisms concerning what types
E-mail: lindamccormick@aglaw-assn.org lien.” IRS also admitted that the issue has of interest would be represented on the
never been decided directly by the courts. task force. Some also called for the com-
Contributing Editors: Anthony Schutz, Lincoln, NE; John
Becker, Penn State University; Phil Fraas, Washington, Also, the statute is not entirely clear on the mittee to conduct the hearings that the
D.C.; Roger McEowen, Iowa StateUniversity; Robert P. issue. The practical problem is that a spe- task force would conduct under the bill.
Achenbach, Eugene, OR.
cial lien (which must be filed or otherwise LB516 has been denominated as a priority
For AALA membership information, contact Robert perfected) could mislead third parties who bill for the Agriculture Committee.
Achenbach, Executive Director, AALA, P.O. Box 2025,
Eugene, OR 97405. Phone 541-485-1090. E-mail
search the records. The special lien will In the Jones case, the district court is-
RobertA@aglaw-assn.org. show up in the records, but the general lien sued a permanent injunction and declara-
will not since it is not filed anywhere. So, if tory judgment after the Eighth Circuit’s
Agricultural Law Update is published by the American
Agricultural Law Association, Publication office: County the general lien is not extinguished (in its mandate issued. The parties stipulated to
Line Printing, Inc. 6292 NE 14th Street, Des Moines, IA entirety) when the special estate tax lien the payment of attorney fees for the six
50313. All rights reserved. First class postage paid at Des
Moines, IA 50313. is filed– third parties might assume that plaintiffs in the amount of $298,812.51, as
the estate has completely taken care of its well as costs of $3,301.65. In that stipula-
This publication is designed to provide accurate and
authoritative information in regard to the subject matter
estate tax obligations (or that the IRS will tion, the State reserved its right to further
covered. It is sold with the understanding that the not pursue any estate assets except those pursue its appeal options. At this point, the
publisher is not engaged in rendering legal, accounting, or subject to the special estate tax lien). State has filed another appeal to the Eighth
other professional service. If legal advice or other expert
assistance is required, the services of a competent Is there a way around this problem? Circuit attacking the declaratory judgment
professional should be sought. One approach might be to require IRS to and the permanent injunction. The U.S.
Views expressed herein are those of the individual file the general estate tax lien at the same Supreme Court denied the petition for writ
authors and should not be interpreted as statements of time it files the special lien. of certiorari on April 2, 2007. 75 U.S.L.W.
policy by the American Agricultural Law Association.
That would eliminate the chance that 3403.
Letters and editorial contributions are welcome and IRS could benefit from a “secret” general –Anthony Schutz, University of
should be directed to Linda Grim McCormick, Editor, 2816 estate tax lien. One thing is for sure–if Nebraska, College of Law
C.R. 163, Alvin, TX 77511, 281-388-0155.
Congress does not amend the statute, it is
Copyright 2007 by American Agricultural Law practically a certainty that the issue will
Association. No part of this newsletter may be reproduced
or transmitted in any form or by any means, electronic or eventually get litigated. If that occurs,
mechanical, including photocopying, recording, or by any there is always the chance that the courts
information storage or retrieval system, without permission
in writing from the publisher.
will not agree with the IRS’ position.
The recent IRS ruling is FAA 20070801F
(Dec. 20, 2006).
–Roger McEowen, Iowa State University

2 AGRICULTURAL LAW UPDATE MARCH 2007
Pennsylvania Commonwealth Court decision on the Agriculture,
Communities and Rural Environment Act (ACRE), Act 38 of 2005.
Since its passage on July 6, 2005, many The first preliminary objection the Court operations. In the court’s opinion, the
agricultural producers and community addressed was whether the Attorney Attorney General’s allegation was not a
officials looked to the courts for interpre- General’s ACRE authority extended to conclusion of fact, which would have been
tation of the authority that the ACRE law land use disputes that, prior to ACRE, had proper pleading, but rather a conclusion
gives the Attorney General to take action been considered to be under the exclusive of law that the Court was not bound to
against local governments that adopt or- jurisdiction of the state zoning enabling accept. In affirming the Objection that this
dinances that limit or restrict agricultural law. Under this law the dispute would have allegation was not specific, the court gave
operations in Pennsylvania. Recent edi- first been heard by the Township Zoning the Attorney General leave to amend the
tions of Agricultural Law Update highlighted Hearing Board, followed by an appeal to petition and raise more details about the
these initial decisions. The case reported the Court of Common Pleas and the Com- local ordinance effect on producers.
in this article is the latest decision to be monwealth Court and beyond, if neces- Under the ACRE law, a “normal agricul-
handed down and is one that adds signifi- sary. ACRE on the other hand, directed tural operation” includes:
cant breadth to a growing body of law in the Attorney General’s petition to go di- The activities, practices, equipment and
this area. In many ways it supports the rectly to Commonwealth Court where its procedures that farmers adopt, use or
ACRE concept of giving the Attorney Gen- decisions would have statewide applica- engage in the production and prepara-
eral authority to critically review local tion. Under ACRE’s procedures, decisions tion for market of poultry, livestock and
government action and a structure to would be made more quickly and at less their products and in the production,
implement that authority. cost to the producer. harvesting and preparation for market
On February 20, 2007, Pennsylvania’s Commonwealth Court concluded the or use of agricultural, agronomic, horti-
Commonwealth Court handed down its authority granted the Attorney General cultural, silviculture and aquaculture
decision in Commonwealth v. Richmond Town- was in conflict with the zoning enabling crops and commodities and is:
ship and its Board of Supervisors (No. 360, law, and therefore it proceeded to decide (1) not less than ten contiguous acres in
M.D. 2006). The Attorney General exer- the issues rather than have the ordinance area; or
cised his authority under ACRE to address challenge decided by a Zoning Hearing (2) less than ten contiguous acres in
enforcement of Richmond Township’s Board. area but has an anticipated yearly gross
2000 ordinance that established a variety A second objection involved whether income of at least $ 10,000.
of restrictions on intensive agricultural the Weavers were required to complete
operations in the Township that are incon- the Zoning Hearing Board process before The term includes new activities, prac-
sistent with other state policies and stat- they could invoke the ACRE protections, tices, equipment and procedures con-
utes. Similar to earlier cases, the ordi- an argument that is similar to the exhaus- sistent with technological development
nance in this case was one that was passed tion of administrative remedies that is within the agricultural industry. Use of
before the ACRE law became effective, common in administrative law. The court equipment includes machinery de-
but it is an ordinance that the Township is held that since the Attorney General is a signed and used for agricultural opera-
enforcing. party to the action before the court, not the tions, including, crop dryers, feed grind-
Kevin and Mary Jane Weaver own a Weavers, whatever the Weavers failed ers, saw mills, hammer mills, refrigera-
farming operation in Richmond Township to do is of no consequence to the Attorney tion equipment, bins and related equip-
that was classified as an intensive agricul- General. ment used to store or prepare crops for
tural operation. The Weavers filed a re- The Township also objected that the marketing and those items of agricul-
quest for a variance and a special excep- Attorney General’s failure to join the tural equipment and machinery defined
tion in regard to their operation. On March Weavers in his petition was a failure to join by the Farm Safety and Occupational
28, 2005 the Weavers filed a land use an indispensable party whose interest Health Act. Custom work is considered
appeal with the Township’s Zoning Hear- would be affected by the decision as re- a normal farming practice.
ing Board. The Board held several hear- quired by civil procedural rules. Com-
ings on the Weavers’ claim that the monwealth Court disagreed as the Attor- The term “normal agricultural opera-
Township’s denial of their requests was ney General had authority under ACRE as tion” is borrowed from the Pennsylvania
unlawful since it relied on the fact that the a public official. Joining every party with Protection of Agricultural Operations from
Weavers failed to comply with a Township an interest is subject to reasonable limita- Nuisance Suits Act, (3 Pa. Cons. Stat. Ann.
set-back requirement, a requirement that tion. Taken literally, practically every citi- section 951-et seq.) the “Right to Farm”
the Weavers claim to be unauthorized as zen in the township would have an interest Law, and is one that has a rich history
it is preempted by state law that affects that would be affected, and joining every- associated with it. When the Right to Farm
regulations that are inconsistent or more one would be unreasonable. In a similar law was passed in 1982, the term included
stringent than state law requirements, manner the court dismissed the Township’s the requirement that a normal agricul-
such as the Nutrient Management Act. objections that service upon it by certified tural operation be one that farmers usu-
Following the passage of ACRE in July, mail instead of personal service by the ally and customarily adopt or use (3 Pa.
2005, the Weavers requested a stay of the Sheriff was improper and that the Notice Cons. Stat. Ann. sections 952). Although
Zoning Hearing Board proceedings in or- to Plead required by Court Rules was not the “usual or customary” standard is one
der to petition the Attorney General to use properly attached to the petition. that makes sense in defining what a nor-
his ACRE authority to address the The Township’s final preliminary objec- mal agricultural operation would be, it has
Township’s unauthorized ordinance. The tion received a different outcome. In this some obvious limitations. Within a short
Attorney General reviewed the ordinance objection the Township objected to the time, the term was amended to remove
and filed a petition with Commonwealth Attorney General’s allegation that the the usual and customary standard and
Court to invalidate the set-back require- Township’s 2000 Ordinance improperly replace it with the current language in-
ment of the ordinance and enjoin the Town- prohibits or limits “normal agricultural cluding the final paragraph, which opens
ship from enforcing it. The Township filed operations.” The Township argued this the door to new developments, practices
preliminary objections on a variety of is- allegation was inadequate as it fails to and procedures that are consistent with
sues, which the Court addressed. specify how the Ordinance affects these Cont. on page 6

MARCH 2007 AGRICULTURAL LAW UPDATE 3
The 2007 farm bill–the drafting process and provisions
that could affect your clients
By Phil Fraas

The Federal “farm bill” is legislation en- A key determinant in crafting a farm bill 1400). In recent years, the litigation has
acted every four or five years to reautho- is the amount of money available for it. died down as the law has become settled
rize and reshape farm price and income Congress is expected to decide on the on specific issues, and farmers and their
support programs. The current farm bill— agriculture committee budget requests advisers have become more familiar with
the Farm Security and Rural Investment some time in April or May. Many expect the details of the limitations.
Act of 2002, Pub. L. 101-171, 116 Stat. 134- that the agriculture committees will get That period of quiet could change sub-
540—is set to expire this year, so Con- authority to spend roughly the same stantially if USDA’s farm bill proposals are
gress has begun the process of writing a amount in the new farm bill as would be adopted by Congress. Among its major
new farm bill. spent if current programs are extended. payment limitation proposals, USDA pro-
The farm bill is comprehensive, typi- Of course, the committees will have the poses to decrease the adjusted gross in-
cally addressing a myriad of topics in discretion to change funding priorities as come (AGI) eligibility cap for payments
addition to price and income support, in- appropriate. from the current $2.5 million to $200,000.
cluding soil and water conservation, agri- The chairmen of the agriculture com- The AGI cap prohibits any payments to a
cultural credit, international agricultural mittees recently announced their sched- person whose adjusted gross income for
trade, Federal nutrition programs, rural ule for actual drafting of the farm bill, and a year exceeds it.
development, and agricultural research, it is an ambitious one. The committees will In arguing that this substantial reduc-
extension, and teaching. hold mark-up sessions in June; take the bill tion in the AGI cap will not substantially
Nutrition programs, primarily the food to the floor and then to joint Senate-House reduce the overall amount of payments
stamp program, take up a large part of the conference in July; give their staffs the made under the farm programs, USDA
money allocated to the farm bill programs. month of August to put the conference cites Internal Revenue Service data that
USDA, in its farm bill proposal, did a pro- agreement into the correct legislative lan- show that, in 2004, there were 38,000 tax
jection of the farm bill baseline, that is, the guage, and then take the conference re- filers who had an AGI of $200,000 or more
amount that will be spent on farm pro- port to the floor for final approval in Sep- and received farm program payments.
grams over the next 10 years if current tember. These persons received only 4.9% of all
programs are extended without change. If Congress adheres to these timelines, farm program payments, or approxi-
Its estimate is that the food stamp and it will be the first time the farm bill will have mately $400,000,000. They include 25,000
related programs would cost $438 billion been finished that early since 1977. For who filed Schedule F as farm proprietors
over that period, which is roughly 70% of farm bills since, completion in late Decem- (which is about 1.2% of all Schedule F filers)
the total estimated cost of $619 billion. To ber has been the norm, and on occasion and 13,000 who filed Form 4835, which is
view the USDA web page dedicated to the the debate has run over, well into the next used by tax filers who do not materially
farm bill and its proposals, go to year. participate in running a farm to report
www.usda.gov, and click on the farm bill The September deadline, however, re- farm rental income or expenses (that num-
icon. mains critical because farmers need to ber is 2% of all Form 4835 filers).
Notwithstanding its large budget im- know what the price and income support USDA also would replace the so-called
pacts, the nutrition title usually is not the rules are going to be well in advance of “three-entity” rule with direct attribution
main focus of congressional debate dur- preparation for spring 2008 planting. In of payments. Under the three-entity rule,
ing the farm bill process. That honor still addition, many other farm bill programs an individual can receive payments
goes to the price and income protection not tied to planting cycles expire or need through three entities, such as family farm
programs, which years ago were the sole renewal by the end of this fiscal year, corporations and partnerships.
focus of the farm bill. which is September 30. In addition, USDA proposes to issue
new rules to strengthen what it character-
The farm bill drafting process Some farm bill issues of interest to rural izes as the difficult-to-measure require-
The agriculture committees of the Sen- and agricultural law practitioners ments for the active management contri-
ate and House of Representatives will do The 2007 farm bill will address literally bution to a farm operation that enables
the bulk of the work actually crafting the hundreds of farm and rural policies and individuals or entitles to qualify for pro-
farm bill. Farm policies tend to be techni- programs. It would be impossible to do gram payments without contributing la-
cal in nature, requiring specialized exper- justice to even just the major programs in bor to the operation. The details of the new
tise; so usually the rest of Congress looks a short article such as this. So, highlighted rules have not yet been specified. USDA
to the agriculture committees to devise here are five issues the resolution of which notes that, under its proposal, landowners
farm policies that best meet the national could have a substantial impact on the who contribute land to a farm operation
interest, and then approves their work by clients of rural and agricultural law prac- and receive crop share rent would con-
large margins. titioners. tinue to be considered actively engaged in
The agriculture committees have been agriculture and eligible for program pay-
holding extensive hearings on farm bill Payment limitations ments.
issues for a year now, and will continue Federal law limits to $360,000 the amount Further worth noting here, USDA’s pro-
doing so for another month or so. In addi- of farm program payments a person can posal would repeal the separate payment
tion, they recently put in their farm bill receive annually. Over the years, there limitations for honey, peanut, and wool
budget requests. has been much litigation on the applica- and mohair program payments.
tion of the limitations in particular circum- Opposition to USDA’s payment limit
stances, and on the scope and meaning of changes, especially the change in the AGI
Phil Fraas is a solo practitioner in Washington, USDA’s regulations to implement pay- cap, is already mounting in Congress, but
D.C. ment limitations (see 7 C.F.R. parts 795 and there still is a reasonable likelihood that

4 AGRICULTURAL LAW UPDATE MARCH 2007
we will see some payment limit changes ers. Under WTO rules, U.S. direct farm Whether or not Congress adopts these
come out of this farm bill. First, USDA payments are classified as trade-distort- recommendations, there likely will be a
estimates that its proposed changes would ing because the limitations on planting vigorous effort to remedy the disaster
save $1.5 billion over 10 years, thus free- flexibility that those payments are tied to assistance dilemma. A perennial problem
ing up money for new priorities in an currently prohibit the planting of fruits, the government faces in helping farmers
otherwise extremely tight farm bill bud- vegetables, and wild rice on base acres deal with natural disasters is that, while
get. Also, there is a vocal constituency for eligible for payments. It is believed that, to ideally all disaster assistance would be in
payment limitation reform in Congress meet our commitments to reduce trade- the form of crop insurance indemnifica-
who believes the current payment limit distorting support programs, the U.S. must tion, for various reasons (including lack of
rules tilt the playing field too far toward the lift that prohibition on planting fruits, veg- full participation and coverage in the crop
largest operators. etables, and wild rice on base acres. insurance program), farmers turn to Con-
Details of USDA’s payment limitation USDA is proposing just that, and Con- gress for direct payments to supplement
proposals can be accessed by clicking on gress will have to give every consider- insurance indemnities whenever a major
“download full proposal” in the right col- ation to adding that proposal in the farm disaster hits. The result has been a patch-
umn of USDA’s farm bill web page and bill, given the importance of world trade work series of ad hoc disaster payment
going to the section of the proposal en- and WTO compliance to U.S. agriculture. measures enacted into law over the last 20
titled “Title I Commodity Programs.” The Naturally, fruit and vegetable producers years.
description of the payment limit propos- will oppose losing this protection from The Chairman of the House Committee
als is on pages 18-20 of that section. competing production by program crop on Agriculture, Cong. Collin Peterson
growers. So, to make the medicine (Dem.-Minn.), has spoken out strongly
Assistance for renewable energy development moreeasy to swallow, USDA is also pro- about the need to replace this current ad
The recent explosion of projects in rural posing that the farm bill authorize an ad- hoc method of assistance with a perma-
United States to build ethanol facilities is ditional $2.75 billion for purchases of fruits nent disaster assistance program that is
well documented in the press. With the and vegetables for the school lunch and fair and efficient.
Nation firmly committed to developing other nutrition programs. It can be expected that the House Com-
alternative sources of energy to reduce It is hard to say how this issue will be mittee will try to come up with such a
dependence on foreign oil, it is anticipated resolved, but it likely will be hotly debated. measure; and both the House and Senate
that the demand for ethanol and other will give close consideration to the USDA
biofuels will intensify in coming years. Agribusiness competition crop insurance cost-cutting proposals
In tune with this new policy orientation, In the past few years, some members of because of the potential savings involved.
the USDA farm bill proposal has a major Congress have become increasingly con- The ultimate result could be major changes
renewable energy title. It would authorize cerned about the possible harmful effects in how the Federal government provides
more than $1.6 billion in new funding and of mergers and acquisitions that are lead- disaster assistance to farmers.
would target programs to develop cellulo- ing to consolidation in agribusiness. This
sic ethanol production. Included would be has led for some to call for a competition Summary
$500 million for bio-energy research; $500 package in the farm bill to toughen rules We should have the first inklings of how
million for alternative energy and energy under the Agricultural Fair Practices Act, things might go on these issues and others
efficiency projects that directly help farm- and improve enforcement of the Packers that might affect your clients when the
ers, ranchers, and rural small businesses; and Stockyards Act. Since one of those Agriculture Committee chairmen release
and $210 million to support $2.1 billion in calling for action is the chairman of the their positions on the issues in May. Then,
loan guarantees for cellulosic ethanol Senate Committee on Agriculture, Nutri- things become much clearer by June, when
projects in rural areas. Because biofuel tion, and Forestry, Sen. Tom Harkin (Dem.- the committees start casting votes on the
has many supporters on Capitol Hill, look Iowa), look for serious consideration to be issues. In interim, you can keep abreast of
for the USDA proposals to be adopted or given to a competition package being in- developments by checking my farm bill
even increased by Congress in the farm cluded in the farm bill. blog, www.farmbill2007.com, which will
bill. chronicle farm bill developments on a
Disaster assistance weekly basis.
New provisions affecting fruit and vegetable USDA’s farm bill proposal would cut
producers spending under the crop insurance pro-
Practitioners representing fruit and gram by $2.5 billion over 10 years, to
vegetable producers have not had to worry enable it to increase spending in other
about the farm bill programs up until now parts of the farm bill. Primarily, the sav-
because the farm bill price and income ings would come from two changes: (1)
programs have focused on grains, oil- reducing the expected loss ratio for the
seeds, and cotton only. It could be differ- program from 1.075 to an actuarially bal-
ent by the time the 2007 farm bill becomes anced level of 1.00, which would effec-
law. tively increase premium costs; and (2) a
The United States is now confronting a series of cost-cutting moves, including
World Trade Organization (WTO) compli- reductions in premium subsidies and in
ance problem that most likely will be ad- administrative and operating expense
dressed in the farm bill and possibly ad- reimbursement to the companies that
versely affect fruit and vegetable produc- actually sell the policies to farmers.

MARCH 2007 AGRICULTURAL LAW UPDATE 5
ACRE/ cont. from page 3
the growth and development of technol- Federal Register summary from February 24, 2007
ogy in the agricultural sector.
The change in the definition that re- to March 23, 2007
moves the “usual and customary” stan- BRUCELLOSIS. The APHIS has submitted to the Secretary of Agriculture
dard is significant for it allows the agricul- adopted as final regulations amending by the National Organic Standards Board
tural sector to evolve in response to a the brucellosis regulations concerning the from November 17, 2005 through October
variety of factors but still retain its treat- interstate movement of cattle by chang- 19, 2006. The recommendations ad-
ment as normal. Within the agricultural ing the classification of Wyoming from dressed in this proposed rule pertain to
sector, considerable change occurred in Class A to Class Free. 72 Fed. Reg. 13428 the continued exemption and prohibition
the past 20 years and the flexibility inher- (March 22, 2007). of 169 substances in organic production
ent in the definition of a “normal agricul- and handling. Consistent with the recom-
tural operation” that qualifies for Right to CROP INSURANCE. The FCIC has mendations from the NOSB, this proposed
Farm protection has been a crucial part in adopted as final regulations amending rule would renew 166 of the 169 exemp-
promoting that development by extend- the Common Crop Insurance Regulations, tions and prohibitions on the National List
ing Right to Farm protection to these new Walnut Crop Insurance Provisions and (along with any restrictive annotations),
activities, practices, equipment, and pro- Almond Crop Insurance Provisions to and remove 3 exemptions from the Na-
cedures, provided they are consistent with reduce the insurable age requirements tional List. 72 Fed. Reg. 9872 (March 6,
technological development within the for almonds and walnuts because of the 2007).
agricultural industry. Incorporating this new varieties available. The changes will
definition into ACRE extends the protec- be applicable for the 2007 and succeeding VETERINARIANS. The APHIS has is-
tion of that law as well. crop years. 72 Fed. Reg. 10908 (March 12, sued amended proposed regulations
—John Becker, Penn State University 2007). making three changes related to a pro-
posed rule published at 71 Fed. Reg. 31109
GRADING. The AMS has adopted as (June 1, 2006), that would amend the regu-
final regulations increasing the fees and lations regarding the National Veterinary
New booklet on charges for federal voluntary egg, poul- Accreditation Program. The June 2006
try, and rabbit grading, certification, and proposed rule would establish two ac-
farmers’ market rules audit services, and establishing a sepa- creditation categories in place of the cur-
Farmers’ Legal Action Group, Inc. (FLAG) rate billing rate for the audit services. 72 rent single category, add requirements
announces a new booklet, Understanding Fed. Reg. 11773 (March 14, 2007). for supplemental training and renewal of
Farmers’ Market Rules. The booklet contains accreditation, and offer accreditation spe-
important legal information for farmers KARNAL BUNT. The APHIS has cializations. The amendments to the pro-
who sell their vegetables, fruits, flowers, adopted as final regulations removing posed rule adjust the scope of the two
meats, and other foods at farmers’ mar- areas in Maricopa and Pinal counties in accreditation categories to require initial
kets. FLAG wrote the booklet to help an- Arizona and Archer, Baylor, Knox, accreditation training for veterinarians
swer questions it received from farmers. McCulloch, San Saba, Throckmorton, and seeking accreditation; to require newly
Farmers’ markets are especially popular Young counties in Texas from the list of accredited veterinarians to renew their
among beginning farmers, immigrant regulated areas subject to quarantine for accreditation three years after complet-
farmers, specialty crop farmers, and lim- Karnal bunt. 72 Fed. Reg. 10593 (March 9, ing initial accreditation training; and to
ited resource farmers. Many farmers who 2007). reduce the training required for renewal
are interested in direct marketing and of accreditation from the amount dis-
value-added agriculture begin by selling NATIONAL ORGANIC PROGRAM. cussed in the June 2006 proposal. 72 Fed.
at farmers’ markets. Because farmers’ The AMS has issued proposed regula- Reg. 8634 (Feb. 27, 2007).
markets appeal to new farmers and to tions which amend the USDA’s National —Robert P. Achenbach, Jr., AALA
farmers with little direct marketing expe- List of Allowed and Prohibited Substances Executive Director
rience, there is a greater need for infor- regulations to reflect recommendations
mation for farmers to turn to when they
have questions.
The booklet is intended to help farmers
understand their responsibilities and rights State and Federal roundup
as farmers’ market vendors....The focus ANIMALS. The plaintiffs were injured to raise a material issue of fact as to
of the booklet is on preventing problems when their car struck a bull on the high- whether the defendant breached a duty to
by improving understanding of market way. The bull was owned by one defen- prevent the escape of the bull. Under Tex.
rules. But the booklet offers practical sug- dant but kept on the farm owned by the Agric. Code section 143.074, owners of
gestions farmers can follow to try to re- defendant’s son. The evidence showed livestock owe a duty to not permit live-
solve any problems that may arise. It also that the son had known about three prior stock to run at large. The court held that
gives ideas on how to learn about other escapes by the bull and had erected an the mere ownership of the bull was not
requirements that may apply to sales at a electric fence which had otherwise pre- sufficient to show a breach of the duty
farmers’ market. In addition to market vented the escape of the bull. The evi- where the bull was not kept in the owner’s
rules, a market vendor’s rights and re- dence also showed that no damage to the possession and the owner did not know
sponsibilities may also be governed by fence was seen on the day of the accident. that the bull had escaped from the
federal, state, and local laws. The defendant testified that the defen- possessor’s property. The court noted
A free copy of the article can be re- dant did not know about the escapes and that, in order for the statutory duty to
quested by calling FLAG’s office at 651- had not inspected all of the fence. The trial apply, the owner had to permit the bull to
223-5400. Minnesota callers may dial court granted “no evidence” summary run at large and the evidence in this case
FLAG’s office at 1-877-860-4349. The ar- judgment as to the defendant and the did not show that the defendant had,
ticle can also be downloaded from FLAG’s plaintiffs appealed, arguing that the through act or omission, permitted the
website at: www.flaginc.org. defendant’s failure to do anything to pre- bull to run at large; therefore, the defen-
—FLAG news release vent the bull from escaping was sufficient Cont. on page 7

6 AGRICULTURAL LAW UPDATE MARCH 2007
State and federal roundup/Cont. from p. 6
dant did not breach any duty to the plain- DOMESTIC PRODUCTION DEDUC- the petitioner had successfully rebutted
tiffs and summary judgment was proper. TION. The IRS has adopted as final the evidence sufficient to cast doubt on
Van Horne v. Harris, 2007 Tex. App. LEXIS regulations a revision of previously is- the existence of soring. On administrative
2266 (Tex. Ct. App. 2007). sued final regulations to clarify that an appeal, the Judicial Officer reinstated the
agricultural or horticultural cooperative violations, ruling that the rebuttal argu-
CHAPTER 12 BANKRUPTCY. The may apply the rules for cooperatives pro- ments were insufficient to overturn the
debtor was a farm partnership of four vided in I.R.C. section 199(d)(3) and Treas. on-site inspections of three trained in-
individuals and a limited liability corpora- Reg. section 1.199-6 to any portion of the spectors. Although the court noted that
tion. The debtor had assets of just over $5 I.R.C. section 199 deduction that is not the issue was close, the court held that the
million and total claims of just over $3 passed through to its patrons. In addition, Judicial Officer’s ruling was affirmed be-
million. The Chapter 12 plan provided for a cooperative’s qualified production ac- cause it was based on substantial evi-
interest payments on secured claims, new tivities income is computed without tak- dence of the professional examinations.
priority security interests for operating ing into account any deduction allowable Zahnd v. U.S.D.A., 2007 U.S. App. LEXIS
loans, and payoff of all claims within five under I.R.C. sections 1382(b)) or 1382(c), 3752 (11th Cir. 2007).
years by obtaining new financing. The relating to patronage dividends, per-unit
creditors objected to the plan because (1) retain allocations, and nonpatronage dis- INSURANCE. The insured operated a
of bad faith in that the partnership was tributions. 72 Fed. Reg. 12969 (March 20, farm and lived with the parent of the
poorly controlled as to the financing ob- 2007). injured person. The injured person was
tained pre-petition and (2) the plan was not age 16 at the time of the accident, which
feasible. The court held that poor pre- FEDERAL TAXATION. I.R.C. section occurred on the farm while the person was
petition management of the financial af- 447(i) provides that if a family farming operating a corn chopper. The insurance
fairs of the partnership business was not corporation is required to change its ac- company refused to defend or indemnify
sufficient cause for bad faith filing of the counting method prior to June 9, 1997, it the insured against the claims of the in-
bankruptcy petition. The debtor’s plan must establish and maintain a suspense jured person because the insurance policy
acknowledged that the history of the farm account instead of taking adjustments excluded coverage for “any ... person
did not support a feasible plan, but the with respect to the amounts included in under the age of twenty-one in [the] care
debtor proposed changes in the farm op- the suspense accounts. I.R.C. section [of an insured] or in the care of [an insured’s]
eration to make the farm more profitable, 447(i)(5) provides that no suspense ac- resident relatives....” The court held that
including (1) elimination of Christmas and count may be established with respect to the insurance policy covered the insured’s
orange tree operations, (2) planting more changes of accounting method after June liability in this case because the testimony
reliable crops and increasing crop yields, 8, 1997, and I.R.C. section 447(i)(5)(B) of the injured person, the parent, and the
and (3) change from grass seed to wheat provides for the phasing out of suspense insured demonstrated that the insured
seed crops. The creditors objected to the accounts over 20 years, setting the had no control over or care of the injured
plan as unfeasible because even with the amount of annual reduction to be based person at the time of the accident.
rosy profit projections, the refinancing of on an “applicable portion” of the account. Chautauqua Patrons Ins. Ass’n v. Ross,
all the debts was not possible. The court, in The use of the same amount as the appli- 2007 N.Y. App. Div. LEXIS 3366 (Sup. Ct.
a “letter” to the parties’ counsel, confirmed cable portion every year by some tax- N.Y. 2007).
the plan on the condition that the debtor payers was inconsistent with the statute,
submit a modified plan which provided for which indicates that the reduction amount SECURED TRANSACTIONS. The
the contingency that, if the profit projec- must reflect prior reductions. In a Chief debtor had granted to a bank a blanket
tions did not occur, the debtor would insti- Counsel advice letter, the IRS ruled that security interest in the debtor’s personal
tute more drastic provisions, including liq- the applicable portion should be recalcu- property. The debtor also purchased two
uidation of assets. In re Volker, 2007 Bankr. lated on an annual basis during the first 20 pieces of farm equipment from a dealer
LEXIS 708 (Bankr. D. Or. 2007). years and that the applicable portion for and granted the dealer a security interest
a taxable year will be greater than the in the equipment. The dealer filed financ-
CHAPTER 12 BANKRUPTCY. The debt- applicable portion in a prior year when- ing statements but listed the name of the
ors, husband and wife, filed for Chapter 12 ever the suspense account was reduced debtor as “Mike Borden” instead of the
bankruptcy, and a creditor objected to the in a prior year by an amount less than the debtor’s full name of “Michael Borden.”
debtors’ eligibility for Chapter 12 based on applicable portion for that year. CCA Ltr. The bank argued that the dealer’s security
the debtors’ Schedule F income reported Rul. 200708071, Jan. 22, 2007. interest was unperfected because the fi-
for the tax year before filing for bank- nancing statement included a misleading
ruptcy. In particular, the creditor argued HORSE PROTECTION ACT. The name in using Mike instead of Michael.
that the proceeds from the sale of a truck petitioner’s Tennessee Walking Horse The evidence showed that the debtor of-
and trailer were not farm income because was inspected after arriving at a horse ten signed legal documents with the name
the depreciation for the equipment was show by the show’s HPA compliance per- Mike. The court noted that the state’s web-
reported on Schedule C, Form 4562. The son and two veterinarians. The three in- based U.C.C. search system did not allow
court noted that the truck and trailer were spectors concluded that the horse’s feet for generic character searches to account
used primarily for farm operations in haul- had been sored by use of chemicals or for all variations of a debtor’s name. The
ing hay, straw, and cattle; therefore, the mechanical means and issued tickets for court held that the full legal name of a
proceeds of the sale of the equipment violation of the HPA. The petitioner ar- debtor was required for perfection of a
were farm income. With the sale proceeds gued that the horse’s feet suffered from financing statement, placing the burden
included in farm income, the debtors’ farm a long transport to the show, the peti- on a filing creditor to determine the debtor’s
income for the tax year prior to the bank- tioner had never been cited before for legal name and not on a searching credi-
ruptcy petition was 51.47 percent of total soring a horse in over 15 years, and that tor who would have to guess at the pos-
income and qualified the debtors for Chap- the repeated examinations by three per- sible legal name. In re Borden, 353 B.R. 886
ter 12. In re Wilson, 2007 Bankr. LEXIS 359 sons could have explained the reactions (Bankr. D. Neb. 2006).
(Bankr. D. Mont. 2007). of the horse. The Administrative Law —Robert P. Achenbach, Jr. AALA
Judge dismissed the violations because Executive Director

MARCH 2007 AGRICULTURAL LAW UPDATE 7
AALA Board Nominations
The AALA Board Nominations Committee is seeking suggestions for nomination for the 2008-2010 board and the
2008 president-elect. Please contact Don Uchtmann, e-mail: uchtmann@uiuc.edu by May 1, 2007.

2007 Annual Conference
President-elect Roger McEowen is well into the planning of an excellent program for the 2007 Annual Agricultural
Law Symposium at the Wyndham Hotel (soon to be renamed as an Westin Hotel) in sunny downtown San Diego, CA,
October 19-20, 2007. As soon as the program is virtually complete, we will post it on the AALA web site. Mark your
calendars and plan a trip to enjoy the sights, sounds, animals and sunshine. Brochures will be printed and mailed as
soon as the program plans are complete.

2006 Conference Handbook on CD-ROM
Didn’t attend the conference in Savannah but still want a copy of the papers? Get the entire written handbook plus
the 1998-2006 past issues of the Agricultural Law Update on CD. The files are in searchable PDF with a table of contents
that is linked to the beginning of each paper. Order for $45.00 postpaid from AALA, P.O. Box 2025, Eugene, OR 97402
or e-mail RobertA@aglaw-assn.org Copies of the printed version are also available for $90.00. Both items can also
be ordered using PayPal or credit card using the 2006 conference registration form on the AALA web site.

Robert P. Achenbach, Jr,
AALA Executive Director
RobertA@aglaw-assn.org
Ph 541-485-1090 Fax 541-302-1958

8 AGRICULTURAL LAW UPDATE MARCH 2007