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IRS Notice on self-employment tax for
CRP payments
The uncertainty in handling conservation reserve program (CRP) payments existing
since 20031 has been partially reduced, in a manner adverse to taxpayers, by the
issuance of Notice 2006-108 in early December, 2006.2 The Internal Revenue Service
response to the controversy was to – (1) issue Notice 2006-108;3 (2) announce that a
revenue ruling is forthcoming; (3) obsolete Rev. Rul. 60-32,4 a key ruling in this area for

INSIDE nearly 50 years; and (4) invite comments on the Notice through March 19, 2007.
The action taken by the Internal Revenue Service is in direct opposition to what was
well-settled law dating back to 19885 and will mean a significant tax increase for retired
and disabled taxpayers and for investors whose CRP land does not bear a “direct
nexus” to a trade or business of farming.6
• Agricultural law
bibliography: 4th IRS Guidance being relied on by taxpayers
quarter 2006 In 1988, the Internal Revenue Service issued a private letter ruling7 indicating that
payments received by a retired landowner who bid land into the conservation reserve
program were not subject to self-employment tax.8 Various statements from both IRS
• Tax Relief and Health and the Social Security Administration indicated that where the farm operator or
Care Act of 2006 owner was materially participating in the farm operation, CRP payments were
properly includible in net earnings from self-employment, subject to self-employment
• Federal Register tax.9
summary Additional guidance came from a 1996 Tax Court case10 involving a Texas farmer
who bought land already under a CRP contract. The Tax Court held that the CRP
payments were subject to self-employment tax because of the “direct nexus” or
Solicitation of articles: All AALA connection with the farming operation.11 The farmer used the equipment and employ-
members are invited to submit ar- ees from the farming operation to maintain the seeding on the CRP acreage and to
ticles to the Update. Please include clip the weeds and admitted that, at the end of the 10-year CRP contract, the land would
copies of decisions and legislation be part of the regular farming operation. Under that case, retired landowner who had
with the article. To avoid duplica- land enrolled in the CRP would not have SE income from the payments and neither
tion of effort, please notify the Edi- would a mere investor who had land in the CRP.12
tor of your proposed article.
Cont. on p. 2

Re: Act 38 of 2005: “A State Solution to
• Nebraska corporate-
farming ban Resolving Conflicts That Involve Agriculture,
unconstitutional: Communities and the Rural Environment”
what does “the farm”
In the past 30 years, public policy measures in most states addressed promotion of
mean? the continued development and successful operation of agricultural production
facilities. Passage of “Right to Farm” laws, Agricultural Districts or Security Area laws,
Sale or Donation of Conservation Easement programs, promotion of effective
Agricultural Zoning programs, and Pre-emption of conflicting local laws by uniform
state laws are common examples of how these policy measures have been put into
practice.1 Despite these measures, however, community objections to production
facilities, large scale animal feeding operations in particular, have continued.2 In some
cases, local communities adopted measures that seemingly flew in the face of local
authority that was affected by these policy measures. Producers who were adversely
affected by such local government action could challenge these measures, but the cost
of doing so would be prohibitive. Here are some examples.
A) In 1998, Granville Township, Bradford County, enacted an ordinance that
imposed restrictions on site selection for concentrated animal feeding operations and
their manure storage facilities. A number of Township farmers filed a complaint in
equity3 challenging the Township’s authority to enact these restrictions and asserting
Cont. on page 2


A 1998 Tax Court case held that CRP guage also appeared to apply to other trol” assures the “continuity and regular-
payments were “rent” and not subject to federal conservation-oriented programs ity” necessary to be a trade or business.25
self-employment tax13 but that decision such as the conservation security pro- The Notice obsoletes Rev. Rul. 60-3226 which
was overturned on appeal.14 The appel- gram, the wetlands reserve program, and posed an embarrassing obstacle to the
late court, in dictum, specifically rejected the grasslands reserve program. reasoning in Notice 2006-108.27
the application of “material participation” The CCA letter ruling triggered several The Notice does not mention other fed-
to CRP contracts (pointing out that mate- responses. Legislative bills that had been eral conservation programs but at least
rial participation was applicable only to introduced earlier18 were dusted off and some of those programs are also likely to
landlord-tenant relationships). It is impor- reintroduced.19 And Rep. Earl Pomeroy of fall within the scope of the Notice with the
tant to note that the Sixth Circuit Court of North Dakota commenced a crusade to expansive interpretation employed of
Appeals reversed the Tax Court decision convince IRS that their position was not in “trade or business.”
without articulating a clear test as to the accord with established tax law. A meet- —Neil E. Harl, Professor of Economics,
line between what is and what is not a ing in Bismarck, North Dakota, on March Iowa State University. Reprinted by
trade or business as required by the stat- 26, 2004, produced little in the way of re- permission from 18 Agric. L. Dig. 1 (2007)
ute. 15 sults so Pomeroy arranged a meeting on
June 8, 2004 in Washington, D.C. with IRS See CCA Ltr. Rul. 200325002, May 29,
The 2003 “bomb shell” Commissioner Mark Everson and several 2003.
On June 23, 2003, IRS issued a Chief senior IRS staff members. At both meet- Notice 2006-108, I.R.B. 2006-51. See
Counsel’s Office letter ruling, stating that ings, this author laid out a history of the generally 4 Harl, Agricultural Law §§
all CRP payments should be reported on controversy and urged IRS to harmonize 27.03[4][e], 37.03[3][b] (2006); Harl, Agricul-
a business schedule, not a Form 4835 (for the 1988 and 2003 rulings. tural Law Manual § 4.02(1)(e) (2006). See
non-material participation landlords) or At the request of Commissioner also Harl, “Comments Sent to the IRS On
Schedule E (rents).16 That meant that all Everson, a file of materials was submitted Notice 2006-108, I.R.B. 2006-51,” 18 Agric. L.
CRP payments would be subject to the 15.3 in late June of 2004. In October of 2005, IRS Dig. 2 (2007); Harl, “Developments in CRP
percent self-employment tax, including admitted to losing the file so a replace- Payment Reporting,” 14 Agric. L. Dig. 97
payments to retired or disabled landown- ment file was submitted. The IRS response (2006).
ers as well as to mere investors with land came on December 5, 2006.20 3
I.R.B. 2006-51.
under CRP contracts.17 Moreover, the lan- 4
1960-1 C.B. 23.
Notice 2006-108 Ltr. Rul. 8822064, March 7, 1988.
The IRS response, Notice 2006-108,21 in- 6
See Ray v. Comm’r, T.C. Memo. 1996-
dicated that a revenue ruling was antici- 436.
pated with an opportunity for comments Ltr. Rul. 8822064, March 7, 1988.
through March 19, 2007. Id.
The Notice examined two fact situations– E.g., Letter from Peter K. Scott, Asso-
a farmer carrying on a farming operation ciate Chief Counsel, Technical, March 10,
VOL. 24, NO. 1, WHOLE NO. 278 JANUARY 2007
AALA Editor..........................Linda Grim McCormick who bids part of the land into the CRP; the 1987.
other fact situation involved a situation Ray v. Comm’r, T.C. Memo. 1886-436.
2816 C.R. 163, Alvin, TX 77511 11
Phone: (281) 388-0155
where the landowner rented out part of Id.
E-mail: the land and bid the rest into CRP, with the Id.
(temporary) work on the CRP land done by a third party. 13
Wuebker v. Comm’r, 110 T.C. 431
Contributing Editors: Neil E. Harl, Iowa State University; In both instances, the payments were (1998).
Drew Kershen, University of Oklahoma; Roger A. subject to self-employment tax. Commissioner v. Wuebker, 205 F.3d 897
McEowen, Iowa State University; John C. Becker, Penn
State; Chuck Munson, National AgLaw Center, In its reasoning, IRS tossed out material (6th Cir. 2000).
Fayetteville, AR; Robert P. Achenbach, Eugene, OR. participation, citing Wuebker v. Commis- I.R.C. § 1402(a).
For AALA membership information, contact Robert
sioner,22 as applicable only to landlord- 16
CCA Ltr. Rul. 200325002, May 29, 2003.
Achenbach, Executive Director, AALA, P.O. Box 2025, tenant relationships, disregarded the “di- Id.
Eugene, OR 97405. Phone 541-485-1090. E-mail 18
rect nexus” concept of Ray v. Commis- S. 2422, S. 2344, H.R. 4212, 106th Cong.,
sioner,23 and interpreted the statutory lan- 2d Sess. (2000).
Agricultural Law Update is published by the American guage of “trade or business” as inter- S. 665, S. 1316, 108th Cong., 1st Sess.
Agricultural Law Association, Publication office: County
Line Printing,Inc. 6292 NE 14th Street, Des Moines, IA preted by the U.S. Supreme Court as re- (2003).
50313. All rights reserved. First class postage paid at Des quiring that a taxpayer be “. . . involved in Notice 2006-108, I.R.B. 2006-51.
Moines, IA 50313. 21
the activity with continuity and regularity Id.
This publication is designed to provide accurate and and . . . the taxpayer’s primary purpose for 205 F.3d 897 (6th Cir. 2000).
authoritative information in regard to the subject matter engaging in the activity must be for in- 23
T.C. Memo. 1996-436.
covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or come or profit.”24 The Notice baldly as- 24
Commissioner v. Groetzinger, 480 U.S. 23,
other professional service. If legal advice or other expert serts, without support, that “[p]articipation 35 (1987).
assistance is required, the services of a competent 25
professional should be sought. in a CRP contract is a trade or business” Notice 2006-108, I.R.B. 2006-51.
and that the 10-year term during which a 1960-1 C.B. 23.
Views expressed herein are those of the individual 27
authors and should not be interpreted as statements of
CRP participant has duties to perform in I.R.B. 2006-51.
policy by the American Agricultural Law Association. “tilling, seeding, fertilizing, and weed con-
Letters and editorial contributions are welcome and
should be directed to Linda Grim McCormick, Editor, 2816
C.R. 163, Alvin, TX 77511, 281-388-0155. Act 38/Cont. from page 1
Copyright 2006 by American Agricultural Law that the Township’s authority was pre- case, the Court agreed that the inconsis-
Association. No part of this newsletter may be reproduced empted by the state Nutrient Manage- tent ordinance was preempted and or-
or transmitted in any form or by any means, electronic or
mechanical, including photocopying, recording, or by any
ment Act. The farmers complained that dered it to be null and void.
information storage or retrieval system, without permission the ordinance’s restrictions were in con- B) In 2001, two Fulton County, Pennsyl-
in writing from the publisher. flict with and imposed more stringent re- vania farmers challenged a variety of
quirements than the Nutrient Manage- ordinances that Belfast Township passed
ment Act which was passed in 1993. In this Cont. on p. 6

Agricultural law bibliography: 4th quarter 2006
Administrativelaw Smyth & Kershen, Agricultural Biotechnol-
Pittman, Developments in Administrative Law Livestock and Packers & Stockyards ogy: Legal Liability Regimes from Comparative and
and Regulatory Practice, 2005-2006– Agriculture Comment, First Amendment Values at Serious International Perspectives, 6 Global Jurist Ad-
(National AgLaw Center Publications) 11- Risk: The Government Speech Doctrine after ... vances 1-80 2006,
2006 (Johanns v. Livestock Marketing Ass’n, 125 S. Ct. gj/advances/vol6/iss2/art3.
2055, 2005), 55 Cath. U. L. Rev. 795-830 (2006).
Energy issues Fitzgerald, Lobo Returns from Limbo: New Transportation
Comment, Turbines vs. Tallgrass: Law, Policy, Mexico Cattle Growers Ass’n v. U.S. Fish & Wildlife Beecher, Can the Electronic Bill of Lading Go
and a New Solution to Conflict over Wind Farms in Service, 46 Nat. Res. J. 9-64 (2006). Paperless? 40 Intl. L. 627-647 (2006).
the Kansas Flint Hills, 54 U. Kan. L. Rev. 1131-1163 Note, The Outsourcing of Government Speech
(2006). (Johanns v. Livestock Marketing Association, 125 Uniform Commercial Code
S.Ct. 2055, 2005), 33 N. Ky. L. Rev. 547-569 (2006). Article Seven (Documents of Title)
Environmentalissues O’Brien, Animal Identification and the Next Kershen, Article 7: Documents of Title– 2005
Note, Recovering RCRA: How the Ninth Circuit Farm Bill, (National AgLaw Center Publica- Developments, 61 Bus. Law. 1599-1605 (2006).
Mischaracterized Burning Agricultural Byproducts tions) 10-2006 http://
as Reuse in ... (Safe Air for Everyone v. Meyer, 373 If you desire a copy of any article or further
F.3d 1035, 9th Cir. 2004), 29 Environs 251-281 Pendergrass, Varying State Approaches to information, please contact the Law School
(2006). Confidentiality with Premises and Animal Identifi- Library nearest your office. The National AgLaw
cation Systems, 23 Agric. L. Update 4-5 (11- Center website < http://
Equinelaw 2006). > http://
Liebman, Reversing the Refs: An Argument for Student article, The Deplorable Standard of www.aglaw-assn.orghas a very extensive Ag-
Limited Review in Horse Racing, 6 Tex. Rev. Ent. Living Faced by Farmed Animals in America’s Meat ricultural Law Bibliography. If you are looking
& Sports L. 23-54 (2005). Industry and How to Improve Conditions by Elimi- for agricultural law articles, please consult this
nating the Corporate Farm, 9 J. Med. & L. 389-415 bibliographic resource on the National AgLaw
Farm policy and legislative analysis (2005). Center website.
Domestic —Drew L. Kershen, Professor of Law, The
Garrett, Marsh & Marshall, Political Alloca- Marketing boards, marketing orders, market- University of Oklahoma, Norman, OK
tion of US Agriculture Disaster Payments in the ing promotion, & marketing quotas
1990s, 26 Int’l Rev. L. & Econ. 143-161 (2006). Note, Government Speech. It’s What’s for
Dinner: Navigating First Amendment Assertions
Food and Drug law and Generic Commercial Advertisements Funded by Breach of contract
Case Comment, Product Safety–Food and Checkoff Subsidies, 82 N. D. L. Rev. 519-556 2006
Drug Laws: How Bates Changed the Face of Pre- action involving
emption, (Bates v. Dow Agrosciences, L.L.C., 544 Patents, trademarks & trade secrets
U.S. 431, 2005), 82 N.D. L. Rev. 579-604 (2006). Cullet & Kolluru, Plant Variety Protection and Conservation Reserve
Havinga, Private Regulation of Food Safety by Farmers’ Rights – Toward a Broader Understand-
Supermarkets, 28 L. & Pol’y 515-533 (2006). ing, 24 Delhi L. Rev. 41-59 (2003). Program dismissed
Evans & Blakeney, The Protection of Geo- In Barrientos v. United States, No. L-05-163,
Forestry graphical Indications after Doha: Quo Vadis? 9 J. 2006 WL 2414348 (S.D. Tex. Aug. 14, 2006),
Note, Making the Brand: Using Brand Manage- Int’l Econ. L. 575-614 (2006). the United States District Court for the
ment to Encourage Market Acceptance of Forestry Note, A Cheese by Any Other Name: A Palatable Southern District of Texas held that a
Certification, 81 N.Y.U. L. Rev. 1400-1432 (2006). Compromise to the Conflict over Geographical plaintiff enrolled in the Conservation Re-
Indicators, 59 Vand. L. Rev. 873-903 (2006). serve Program had failed to exhaust all
International trade administrative remedies in his claim for
Thorn & Brosch, The Cartagena Protocol on Public lands breach of contract against the United
Biosafety and the World Trade Organization: Imple- Klass, Adverse Possession and Conservation: States Department of Agriculture. Id. at *1-
menting a WTO-Consistent Regulatory Frame- Expanding Traditional Notions of Use and Posses- 3. The court also held that the government
work 19 pp. 11-2004, http:// sion, 77 U. Colo. 283-333 (2006). had not waived its sovereign immunity as it related to the plaintiff’s tortious interfer-
id.15.html. Rural development ence claim because under 28 U.S.C. §
Hammond-Deakin, Sustainable Development, 2680(h) the government does not waive its
Land reform Agriculture and Women in Vietnam, 9 Asia Pac. J. sovereign immunity for “interference with
Prosterman & Hanstad, Land Reform in the Envtl. L. 267-290 (2005). contract rights.” Id. at *3. In addition, the
Twenty-First Century: New Challenges, New Re- court rejected the plaintiff’s request for a
sponses, 4 Seattle J. for Soc. Just. 763-800 (2006). Sustainable & organic farming declaratory judgment that “the manner in
Comment, The Not-So-Organic Dairy Regula- which the Contract was administered . . .
Land use regulation tions of the Organic Food Production Act of 1990, and breached” was “unconstitutional as a
Land use planning and farmland preserva- 30 S.I.U. L. J. 501-531 (2006). violation of Plaintiff’s due process rights
tiontechniques under the Fourteenth Amendment.” Id. at
Richardson, Goldilocks, the Three Bears and Torts and insurance *3. Finally, the court rejected the plaintiff’s
Transfer of Development Rights, 23 Agric. L. Up- Centner, Governments and Unconstitutional Motion for Leave to File Second Amended
date 4-7 (12-2006). Takings: When Do Right-To-Farm Laws Go Too Complaint so that he could add claims for
Richardson, Farmland Protection, 23 Agric. L. Far? 33 B.C. Envtl. Aff. L. Rev. 87-148 (2006). negligence and fraud. Id. at *1-4
Update 4-5, 7 (10-2006). Note, What’s the Buzz? Common Law for the —Chuck Munson, National AgLaw Center
Richardson, Conservation Easements: Smart Commons in Anderson v. State Department of Graduate Assistant, Fayetteville, AR
Growth or Sprawl Promotion, 23 Agric. L. Update Natural Resources, 29 Hamline L. Rev. 338-376
4-5 (9-2006). (2006).

Summary of selected provisions in the Tax Relief and Health Care Act of 2006
By Roger A. McEowen

One of the last acts of the 109th Congress Energy tax provisions (Title II of the Act) of $800 for 2007.31
was to pass H.R. 6111, the Tax Relief and The Act extends several temporary In addition, an individual who is HSA-
Health Care Act of 2006 (Act).1 The Presi- energy tax provisions through 2008: eligible for only part of a year, including
dent signed the Act on December 20, 2006. • The renewable energy credit;16 during the last month of that year, can be
The Act extends some provisions of the • The clean renewable energy bonds treated as eligible for that entire year.32
Code that had either expired or were set credit.17 An individual who does not remain HSA-
to expire soon, and makes key modifica- • The deduction for energy-efficient eligible during the following year is sub-
tions to Health Savings Accounts. This commercial buildings;18 ject to tax on the contributions that would
article summarizes selected provisions of • The credit for energy-efficient have exceeded the deduction limitations,
the Act. homes; 19 had they applied, and a 10 percent penalty
• The credit for residential energy-effi- tax. 33
Extension of various tax provisions (Title cient property;20 The Act also provides that, for pur-
I of the Act) • The energy credit;21 and poses of determining whether an em-
The Act extends the following provi- • The rule contained in I.R.C. § 4041 that ployer is subject to the excise tax in I.R.C.
sions through 2007: lowers the fuel excise tax rate on qualified § 4980G for failing to make comparable
• The deduction for qualified tuition and methanol and ethanol fuel.22 HSA contributions, highly compensated
related expenses for higher education;2 Title II also includes several non-ex- employees are not treated as compa-
• The deduction for state and local sales tender provisions. For example, for cellu- rable participating employees for non-
taxes; 3 losic biomass ethanol plant property highly compensated employees.34
• The research and development credit4 placed in service prior to January 1, 2013,
(the Act also makes other changes, includ- the Act provides an additional first-year Other provisions (Title IV of the Act)
ing increasing the rates for the alternative depreciation deduction equal to 50 per- For purposes of the manufacturer’s de-
incremental credit5 and creating an alter- cent of the taxpayer’s adjusted basis in the duction of I.R.C. § 199, the Act treats Puerto
native simplified credit);6 property.23 Also, the bill increases the Rico as part of the United States, so long
• The work opportunity tax credit and types of expenditures that may be made as the taxpayer’s gross receipts from
welfare-to-work tax credit (the Act also from the Leaking Underground Storage sources within Puerto Rico are subject to
consolidates the two credits);7 Tank Trust Fund,24 and amends the I.R.C. U.S. taxation.35
• The election to treat combat pay as § 45K credit for producing fuel from a non- For alternative minimum tax purposes,
earned income for the earned income tax conventional source so that the credit the minimum tax credit that a taxpayer
credit;8 phaseout, which occurs when the refer- may carry forward to reduce regular in-
• The above-the-line deduction of up to ence price of oil exceeds $23.50 per barrel come taxes in future years is made par-
$250 for out-of-pocket classroom expenses (adjusted for inflation), does not apply to tially refundable for unused credits that
of school teachers;9 facilities producing coke and coke gas.25 have been carried forward.36
• The provision allowing brownfield Under I.R.C. § 6039, corporations in-
remediation costs to be expensed (the Act Health Savings Accounts (Title III of the volved in a transfer of stock options to an
also extends the provision to the cleanup Act) individual must provide information about
of petroleum products);10 The Act allows a one-time tax-free trans- the transfer to the individual. The Act
• The provision allowing 15-year straight- fer of funds from a flexible spending ar- requires that the corporation file a return
line cost recovery for qualified leasehold rangement or health reimbursement ar- with the IRS in addition to providing infor-
improvements;11 rangement to a health savings account mation to the person involved in the trans-
• The enhanced charitable contribution (HSA).26 An employee who fails to remain fer. 37
deduction for corporate donations of com- an eligible individual (e.g., fails to be cov- The Act increases the maximum $500
puter technology equipment;12 ered by a high-deductible health plan) penalty on individuals who file a frivolous
• The authority for Archer medical sav- during the 12-month period following the income tax return to $5,000 and applies the
ings accounts;13 distribution is subject to tax on the distri- penalty provision to all taxpayers and
• The suspension of the percentage bution and a 10 percent penalty tax.27 An federal taxes.38 IRS may impose a penalty
depletion method’s income limitation for employer who offers the distribution to of up to $5,000 on taxpayers who make
oil and natural gas produced from mar- some, but not all, eligible individuals is frivolous submissions for collection due
ginal properties;14 also subject to an excise tax.28 process hearings, installment agree-
The Act extends the following selected The Act also allows a one-time, tax-free ments, offers-in-compromise, and tax-
provisions beyond 2007: distribution (roll-over) from an individual payer assistance orders, and the Act au-
• The new markets tax credit is ex- retirement account to an HSA, subject to thorizes the IRS to disregard such submis-
tended through 2008, and the deadline for several limitations.29 An individual who sions. The Act also requires IRS to publish
placing certain Gulf Opportunity Zone does not remain an eligible individual a list of frivolous positions, arguments,
property in service to be eligible for bonus during the 12-month period following the requests, and submissions.
depreciation is extended through 2010.15 distribution is subject to tax on the distri- The Act makes qualifying settlement
bution and a 10 percent penalty tax. funds for the cleanup of hazardous waste
The Act retools the limits on deductible sites tax-exempt on a permanent basis.39
annual contributions to an HSA.30 HSA During a corporate division such as a
contributions are no longer limited to the spin-off, a distribution of stock in a con-
Roger A. McEowen is Professor of Agricultural annual deductible of the individual’s high trolled subsidiary by a parent corporation
Law, Iowa State University, Ames, Iowa. Mem- deductible health policy. Instead, for 2007, to its shareholders is tax-free to both the
ber of the Nebraska and Kansas Bars; honorary the maximum contribution limit is $2,850 distributing corporation and the share-
member of the Iowa Bar. Reprinted by permis- for single coverage or $5,650 for family holders if the requirements of I.R.C. § 355
sion from 18 Agric. L. Dig. 5 (2007) coverage. Individuals age 55 or over may are met. One requirement is that both the
make an additional catch-up contribution parent corporation and subsidiary must

have engaged in the active conduct of a “(iii) LIMITATION- Clause (i) shall not for making elections under the extended
trade or business for at least five years. apply with respect to any mortgage insur- provisions to account for the fact that
Under TIPRA, the “active conduct” test is ance contracts issued before January 1, some provisions had expired in 2005.
determined by looking at the activities of 2007. Act, § 201, amending I.R.C. § 45(d).
the entire affiliated group, not just the “(iv) TERMINATION- Clause (i) shall Act, § 202, amending I.R.C. § 54. The Act
parent and subsidiary. The Act makes the not apply to amounts— also raises the caps on the amount of
TIPRA provision permanent.40 (I) paid or accrued after De- bonds that may be issued and the amount
Before amendment by TIPRA, the sale cember 31, 2007, or that may be used to finance projects of
of self-created musical works resulted in (II) properly allocable to any governmental bodies.
ordinary income. TIPRA created a tempo- period after such date. . . .” Act, § 204, amending I.R.C. § 179(D)(h).
rary rule that allows a taxpayer to treat the Act, § 205, amending I.R.C. § 45L(g).
1 20
work as a capital asset and, therefore, to Pub. L. No. 109-432. Act, § 206, amending I.R.C. § 25(D)(g).
be taxed on the gain from the sale at the Act, § 101, amending I.R.C. § 222(e). For The Act also replaces the term “qualified
applicable capital gains rates. The Act 2006 and 2007, the above-the-line deduc- photovoltaic property expenditures” with
makes the TIPRA provision permanent.41 tion is set at a maximum of $4,000 for “qualified solar electric property expendi-
Under I.R.C. § 143, mortgage revenue married taxpayers filing jointly with ad- tures.” Act, § 206(b).
bonds are tax-exempt bonds used to fi- justed gross income of $130,000 or less. Act, § 207, amending I.R.C. § 48.
3 22
nance below-market rate mortgages for Act, § 103, amending I.R.C. § 164(b)(5)(I). Act, § 208, amending I.R.C. § 4041(b)(2).
low- and moderate-income homebuyers The deduction is calculated either in ac- Act, § 209, amending I.R.C. § 168.
who have not owned a home for the past cordance with receipts or using the Op- Act, § 210, amending I.R.C. § 9508(c),
three years. The Act provides a one-time tional State Sales Tax Tables contained in effective upon enactment.
waiver of the three-year requirement for IRS Pub. 600. Act, § 211, amending I.R.C. § 45K(g)(2),
bonds used to finance residences for vet- Act, § 104, amending I.R.C. § 41(h)(1)(B). effective for fuel produced and used after
erans. 42 The credit is generally equal to 20 percent December 31, 2005, in taxable years end-
Under I.R.C. § 121, taxpayers may ex- of the taxpayer’s “qualified research ex- ing after such date.
clude from gross income up to $250,000 penses” that exceed a base amount. Act, § 302, amending I.R.C. § 106, appli-
($500,000 if married filing jointly) of the The alternative incremental credit uses cable for distributions made on or after
gain realized from the sale of a principal a “stated percentage” of qualified ex- December 20, 2006. The maximum trans-
residence. The taxpayer must have used penses that exceed the taxpayer’s aver- fer amount is the lesser of the balance as
the property as a principal residence for at age research expenditures over four of the date of the transfer or September
least two of the five years preceding the years. Beginning in 2007, the amount is 3 21, 2006. The transfer must be made be-
date of sale. A taxpayer may elect to percent of qualified research expenses fore January 1, 2012. Enrollment in an FSA
suspend the 5-year period for up to 10 between 1 and 1.5 percent of average in 2006 will not affect eligibility to enroll in
years during the time that the taxpayer or annual gross receipts, 4 percent of quali- a high deductible health plan and have an
spouse is on qualified official extended fied expenses between 1.5 and 2 percent HSA in 2007, if the balance in the FSA is
duty as a member of the uniformed ser- of average annual gross receipts, and 5 zero on December 31, 2006, or if the bal-
vices or U.S. Foreign Service. The Act percent of qualified expenses exceeding 2 ance in the FSA is transferred to the HSA.
allows intelligence community employ- percent. Act, § 305, effective for tax years
ees to make the suspension election for Act, § 104, amending I.R.C. § 41(h)(1)(B), beginning after 2006.
sales made before January 1, 2011.43 effective for 2007. Under the simplified 28
Act, § 306, amending I.R.C. § 4980G.
The Act makes permanent the TIPRA method, the credit is 12 percent of the Act, § 307, amending I.R.C. § 408(d),
rule contained in I.R.C. § 7872 that ex- qualified research expenses that exceed effective for tax years beginning after
empts loans made pursuant to a continu- 50 percent of the average qualified re- December 31, 2006.
ing care contract to a qualified continuing search expenses for the three preceding Act, § 303, amending I.R.C. § 223(b),
care facility from the below-market inter- tax years. If the taxpayer has no qualified paragraph 2.
est rate rules.44 expenses in any one of the preceding 31
The COLAs for determining the limi-
three years, the credit is 6 percent of the tations are to be calculated and released
Mortgage insurance premiums treated as current qualified research expenses. by June 1 of each year. Act, § 304, amend-
interest. Act, § 105, amending I.R.C. §§ 51(c)(4)(B) ing I.R.C. § 223(g), paragraph 1.
The 2006 Act adds a new subparagraph and 51A(f). Act, § 305, effective for tax years
to I.R.C. § 163(h)(3) (qualified residence Act, § 106, amending I.R.C. § beginning after 2006. Thus, enrollees may
interest):45 32(c)(2)(B)(vi)(II). fund a full year’s contribution to their HSA
“(i) IN GENERAL- Premiums paid or Act, § 108, amending I.R.C. § 62(a)(2). for partial year coverage as long as they
accrued for qualified mortgage insurance Eligible taxpayers must work at least 900 remain enrolled in the high deductible
by a taxpayer during the taxable year in hours during the school year. No health policy for 12 months. The previous
connection with acquisition indebtedness carryover of any unused portion of the rule permitted enrollees to only fund their
with respect to a qualified residence of the deduction to a future year is allowed. HSA for the portion of the year in which
taxpayer shall be treated for purposes of Act, § 109, amending I.R.C. § 198(h). they were enrolled in a high deductible
this section as interest which is qualified Act, § 113, amending clauses (iv) and (v) health policy.
residence interest. of I.R.C. § 168(e)(3)(E). Id.
12 34
“(ii) PHASEOUT- The amount otherwise Act, § 116, amending I.R.C. § Act, § 306, amending I.R.C. § 4980F.
treated as interest under clause (i) shall be 170(e)(6)(G). In addition, for contributions Act, § 401, effective for the first two
reduced (but not below zero) by 10 percent after 2005, the deduction is available for taxable years beginning after December
of such amount for each $1,000 ($500 in the equipment “assembled by” the donor. 31, 2005, and before January 1, 2008.
13 36
case of a married individual filing a sepa- Act, § 117, amending paragraphs (2) Act, § 402, effective upon enactment.
rate return) (or fraction thereof) that the and (3)(B) of I.R.C. § 220(i). The unused credit must be from taxable
taxpayer’s adjusted gross income for the Act, § 118, amending I.R.C. § years beginning before January 1, 2013,
taxable year exceeds $100,000 ($50,000 in 613A(c)(6)(H), effective for tax years 2006 and is phased out for higher-income indi-
the case of a married individual filing a and 2007. viduals.
separate return). Act, § 120. I.R.C. § 123 provides rules Cont. on p. 7

Act 38/ cont. from page 2 conflicted with the NMA’s less stringent local ordinance” also includes one that
in 2000.4 Among these ordinances is a setback requirements of up to 300 feet. restricts or limits the ownership structure
Farm Ownership Ordinance that prevents The ZHB issued a 2-1 decision rejecting all of a normal agricultural operation.6 This
farmers raising corporate owned livestock of the landowners’ requested relief. The would seem to be a direct reference to the
from building additional structures to house landowners appealed. Without taking Farm Ownership Ordinance that Belfast
livestock raised under new or existing additional evidence, the trial court affirmed Township adopted from the South Dakota
contracts; an Environmental Protection in part and reversed in part. The trial court model it followed. ACRE is now before the
Ordinance that restricts those who have addressed Landowners’ contention that Commonwealth Court in several cases
been “consistent violators” from doing or the NMA preempts the 1,500-foot setback brought by the Attorney General.
continuing to do business in the Township; requirement contained in Section 804.7 a. In 2006, the Attorney General filed peti-
and a Residential Well and Spring Protec- Accordingly, the trial court determined tions with Commonwealth Court to chal-
tion Act that prevents water withdrawals that to the extent Section 804.7 a. regulates lenge a number of municipal ordinances
of more than 300 gallons without a Town- manure storage facilities, it is more re- that he alleged were “unauthorized” un-
ship Water Use Authorization and a Wa- strictive than the NMA, and it is in conflict der ACRE. Some municipalities challenged
ter Impact Study. The Fulton County farm- with the NMA and its regulations. On ap- the Attorney General action by filing pre-
ers challenged these measures on a vari- peal to Commonwealth Court, the major- liminary objections that charged the At-
ety of grounds, including lack of Township ity opinion affirmed the trial court’s deter- torney General’s action is unwarranted as
authority, preemption by state law, and a mination that the NMA preempted the authority under ACRE regarding ordi-
violation of the dormant commerce clause Township’s local setback requirement. nances on the books on July 6, 2005 is
under federal constitutional law. In the limited to enforcement of those ordi-
farmers’ minds these measures prohib- In each of these cases, individual farm- nances. 7
ited them from expanding their opera- ers were faced with the often greater Two of the cases involving municipal
tions and from forming new business re- financial resources of local communities, preliminary objections were decided in
lationships which affected their economic including their revenue raising capability. mid-December, 2006. In each decision8
interests. In September 2005, The Court Would these individual farmers be forced Commonwealth Court ruled in favor of
of Common Pleas of Fulton County ruled to accept measures that some would say the municipalities and concluded for the
on a series of plaintiffs’ motions for sum- exceeded the limits of municipal author- Attorney General to have authority to
mary judgment. The ruling granted the ity?5 In July, 2005, the Pennsylvania Leg- challenge ordinances passed before July
farmers summary judgment in the case of islature fashioned a solution to this prob- 6, 2005 the Township must have attempted
the Well and Spring Protection Act, but lem by enacting Act 38 of 2005. to enforce the challenged ordinances. The
denied summary judgment in the case of The main purposes of Act 38 were to: a) Township must take action to compel com-
the other two ordinances citing material ensure that local governments enact ordi- pliance with the ordinance or penalize
issues of fact regarding these ordinances. nances regulating normal agricultural noncompliance with it. In the petitions
C) Under the terms of the Richmond operations that are consistent with au- filed with Commonwealth Court, the At-
Township (Berks County) Zoning Ordi- thority given them by the laws of the torney General did not allege that the
nance of 1998, a proposed expansion of an Commonwealth to protect citizens’ health, ordinances were enforced. It was on the
agricultural production facility can be con- safety and welfare; b) provide timely re- failure to allege township enforcement
sidered an “Intensive Agricultural Activ- view of potentially unauthorized local or- that the municipalities challenged the le-
ity” if the area of the tract and the number dinances; c) replace the Nutrient Manage- gal sufficiency of the Attorney General
of animals to be raised on it exceed estab- ment Act (Act 6) by retaining most of the petitions.
lished numbers in the ordinance. To en- current law and regulations, and adding Neither of these decisions affects the
gage in this type of activity in the R-A manure setback and buffer requirements; ACRE law’s validity, only a point concern-
zoning district, landowners are required and d) require certain farms to develop ing its interpretation and application.
to obtain a special exception under the odor management plans. Under this stat- Neither of these decisions upholds the
ordinance. Section 804.7 of the ordinance ute, the State Attorney General was au- challenged Township ordinance(s) and
sets forth five criteria an applicant must thorized to use discretion to bring actions that matter is undecided at this point. Each
satisfy to obtain a special exception for an to invalidate unauthorized local ordi- of the December, 2006 decisions dismissed
intensive agricultural activity. The sec- nances or enjoin the enforcement of un- the Attorney General’s petition without
tion establishes a variety of requirements, authorized local ordinances. If the Attor- prejudice to take other action against the
including 1,500 feet setbacks from any ney General chose not to bring an action Townships involved.
other property and from any other zoning against these municipalities, any person In late December the Attorney General
district. aggrieved by the enactment or enforce- announced he had filed an appeal to the
In October 2002, Stephen Burkholder ment could do so without the Attorney Supreme Court from these Common-
and his wife owned Township land on General’s participation. wealth Court decisions. Stay tuned.
which an agricultural conservation ease- In regard to municipal authority, ACRE —John C. Becker, Penn State, University
ment was placed. They filed an applica- provided that local government can not Park, PA
tion with the Richmond Township Zoning adopt or enforce an ordinance limiting
Hearing Board (ZHB) seeking a special normal agricultural operations if it is not For a more detailed discussion of these
exception for a proposed intensive agri- authorized to do so or it is prohibited or measures and their use to promote agri-
culture facility pursuant to Section 804.7. It preempted from doing so under state law. cultural development see, J. Becker, Pro-
was the Burkolders’ intent to build new Some of the laws that are involved in moting Agricultural Development Through
facilities that would allow them to expand determining whether a local government Land Use Planning Limits, 36 Real P. Pro.
their “partial all in/out” hog raising opera- is authorized to address a problem in- Trust J. 619, (2002).
tion to a “total all in/out” operation. In clude the “Right to Farm” law, the Nutrient For a more detailed discussion of the
order to build these facilities, they need to Management Act (as amended by Act 38), nature of community objections, see C.
have the setback requirement reduced and the Municipalities Planning Code Abdalla, et al., Community Conflicts Over
because of the physical configuration of which gives local government the author- Intensive Livestock Operations: How and Why
their land. In their application, the ity to pass zoning and subdivision laws Do Such Conflicts Escalate?, 7 Drake J. Ag.
Burkholders asserted the 1,500-foot set- and the Agricultural Security Area Laws. L. 7 (2002).
back requirement was invalid because it For ACRE purposes, an “unauthorized Cont. on page 7

Federal Register summary from December 27, 2006 to January12, 2007
CROP INSURANCE. The FCIC has adopted cialty crops, for the purpose of the TASC FSIS will initiate rulemaking on the claim
as final regulations amending the Common Program, are defined to include all cultivated “natural.” 71 Fed. Reg. 70503 (Dec. 5, 2006).
Crop Insurance Regulations, Nursery Crop plants, or the products thereof, produced in
Insurance Provisions by amending the defini- the U.S., except wheat, feed grains, oilseeds, SUGAR. The CCC has announced eligibility
tion of “liners.” The regulations also finalize cotton, rice, peanuts, sugar, and tobacco. 72 criteria and application procedures that will
the Nursery Peak Inventory Endorsement to Fed. Reg. 1311 (Jan. 11, 2007). be used to implement Section 3011 of the
clarify that the peak amount of insurance is Emergency Agricultural Disaster Assistance
limited to 200 percent of the amount of insur- The CCC has announced the availability of Act of 2006 which authorizes the 2005 Louisi-
ance established under the Nursery Crop $2.5 million in funding for the 2007 Quality ana Sugarcane Hurricane Disaster Assis-
Insurance Provisions. The amendments will Samples Program (QSP). The CCC is solicit- tance Program. The 2005 Program required
be applicable to the 2008 and succeeding crop ing applications for participation in the FY the CCC to provide compensation totaling $40
years. 71 Fed. Reg. 74455 (Dec. 12, 2006). 2007 QSP. QSP is administered by personnel million to Louisiana sugarcane producers and
of the Foreign Agricultural Service. The QSP processors who suffered economic losses
The FCIC has issued proposed regulations is designed to encourage the development from the cumulative effects of Hurricanes
amending the Common Crop Insurance and expansion of export markets for U.S. Katrina and Rita in August and September of
Regulations, Millet Crop Insurance Provi- agricultural commodities by assisting U.S. 2005. CCC will make $29 million in payments
sions to remove the reduction in indemnity for entities in providing commodity samples to for 2005-crop (Fiscal Year 2006) losses to af-
any unharvested millet acreage to better potential foreign importers to promote a fected sugarcane processors, who shall share
meet the needs of insured producers. The better understanding and appreciation for these payments with affected producers in a
changes will apply for the 2008 and succeeding the high quality of U.S. agricultural commodi- manner reflecting current contracts between
crop years. 71 Fed. Reg. 77628 (Dec. 27, 2006). ties. 72 Fed. Reg. 1309 (Jan. 11, 2007). the two parties. In addition, CCC will make
payments of $10 million to compensate af-
DISASTER PROGRAMS. The FSA has HORSES. The APHIS has issued proposed fected sugarcane producers for losses that
adopted as final regulations establishing di- regulations amending the regulations per- are suffered only by producers, including
saster relief programs for agricultural pro- taining to the importation of horses to estab- losses due to saltwater flooding, wind dam-
ducers who suffered losses in Hurricanes lish standards for the approval of permanent, age, or increased planting, replanting, or har-
Dennis, Katrina, Ophelia, Rita and Wilma in privately owned quarantine facilities for vesting costs. The funds for “producer-only
Alabama, Florida, Louisiana, Mississippi, North horses. This proposed rule replaces a previ- losses” will be paid to processors, who will
Carolina and Texas. The regulations also ously published proposed rule, which was then disburse payments to affected produc-
provide for grants to states to assist aquacul- withdrawn, that contained substantially dif- ers without regard to contractual arrange-
ture producers who suffered losses from the ferent restrictions on ownership and sub- ments for dividing sugar revenue. CCC is
hurricanes. 72 Fed. Reg. 875 (Jan. 9, 2007). stantially different requirements for the physi- reserving $1 million in the event of appeals
cal plant, operating procedures, and compli- and will disburse the residual, if any, to proces-
EXPORTS. The CCC has announced the ance date. 71 Fed. Reg. 74827 (Dec. 13, 2006). sors, who will then disburse payments to
availability of funding for the 2007 Technical producers in a manner reflecting current
Assistance for Specialty Crops (TASC) Pro- MEAT AND POULTRY PRODUCTS. The contracts between the two parties. 71 Fed.
gram. The CCC is soliciting applications from FSIS has announced the receipt of a petition Reg. 70735 (Dec. 6, 2006).
the private sector and from government agen- from Hormel Foods to establish a definition
cies for participation in the FY 2007 TASC for the voluntary claim “natural” and to delin- TUBERCULOSIS. The APHIS has adopted
Program. The TASC Program is administered eate the conditions under which the claim can as final regulations amending the bovine
by personnel of the Foreign Agricultural Ser- be used on the labels of meat and poultry tuberculosis regulations regarding state and
vice. The TASC program is designed to assist products. The FSIS is inviting comments on zone classifications by raising the designation
U.S. organizations by providing funding for the issue generally and on the petition and, to of Texas from modified accredited advanced
projects that address sanitary, phytosanitary, facilitate the comment process, is announc- to accredited-free. 72 Fed. Reg. 247 (Jan. 4,
and technical barriers that prohibit or threaten ing that it will hold a public meeting to discuss 2007).
the export of U.S. specialty crops. U.S. spe- the petition. After the comment period closes, —Robert P. Achenbach, Jr., AALA Exec. Dir.

Act 38/Cont. from page 6
McClellan, Brubaker et al. v. Granville ers received support from various organi- nances existing on the effective date of
Township Bd. of Supervisors, Bradford County zations and did not pursue this litigation this section ...”.
Court of Common Pleas, 99EQ000016. alone. The details of this support are not Commonwealth v. Lower Oxford Township
Leese and Swope v. Belfast Township and known to the writer, but it is his belief that No. 359, M.D. 2006 and Commonwealth v.
the Belfast Township Board of Supervisors, support of some kind was given. Heidelberg and North Heidelberg Townships, et
Fulton County Court of Common Pleas, Act 38, 2005, section 312, 3 Pa.C.S.A. 312. al No. 357 M.D. 2006.
No. 304 of 2001C. See section 313(b) , “This chapter shall
It has been rumored that these farm- apply to the enforcement of local ordi-

Selected provisions/Cont. from page 5
37 41
Act, § 403, effective upon enactment. Act, § 412, effective for sales or ex- fore January 1, 2011.
38 44
Act, § 407, effective for submissions changes in tax years beginning after May Act, § 425, effective for calendar years
made and issues raised after the date on 17, 2006. beginning after December 31, 2005.
42 45
which the Secretary first prescribes a list Act, § 416, effective for bonds issued Act § 419. The amendments made by
under I.R.C. § 6702(c). after December 20, 2006, and before Janu- this section apply to amounts paid or ac-
Act, § 409, effective May 17, 2006. ary 1, 2011. crued after December 31, 2006, and before
40 43
Act, § 410, effective for distributions Act, § 417, effective for sales or ex- January 1, 2008.
occurring after May 17, 2006. changes after date of enactment and be-

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 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.

2007 Membership Renewals
Many thanks to all the members who have promptly sent in their dues to renew their memberships for 2007. For
those who have not yet done so, please take a few minutes and send in your membership renewal forms and dues.
This will save us the cost of paper and postage for reminders which will be sent in February.

Future Annual Conference Locations
The AALA Board of Directors will soon begin consideration of the location city for the 2009 Annual Agricultural Law
Symposium. Note: the 2007 symposium will be in San Diego and the 2008 symposium will be in Minneapolis. I will be
sending out a questionnaire by e-mail to all members in February for your ideas about what makes a good location
city for the symposium. The costs for the hotels, both for guest rooms and the conference facilities and food, have
been rising dramatically in the last few years and may soon lead to increased registration fees unless various aspects
of the location and symposium are changed. We need your ideas so that the symposium is your annual choice for
CLE and learning about agricultural law developments.
Robert P. Achenbach, Jr,
AALA Executive Director
Ph 541-485-1090 Fax 541-302-1958