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D .C. Circuit r District
ules on Distr Court
ict Court
jur isdiction Over USDA NAD appeals
The D.C. Circuit has ruled that 7 U.S.C. § 6999 places jurisdiction for the review of
final USDA National Appeals Division (USDA NAD) determinations solely in the
federal district courts. Deaf Smith County Grain Processors v. Glickman, 162 F.3d
1206 (D.C. Cir. 1998). The ruling is significant because, prior to the creation of the
USDA NAD in 1994, the government had routinely argued that actions for the review
of farm program determinations could be brought only in the United States Court

INSIDE of Federal Claims pursuant to the Tucker Act, 28 U.S.C. § 1491, if the amount of the
program payments in dispute exceeded $10,000.
The importance of the ruling in Deaf Smith County Grain Processors is best
illustrated by a brief review of a jurisdictional issue that has long plagued farm
• Short-term Chapter program litigation. The review necessarily begins with the fact that the federal
12 extension again government is immune from suit unless it waives its sovereign immunity. Con-
fronted with this immunity, farm program participants seeking judicial review of
adverse determinations traditionally have relied on the waiver of sovereign immu-
• Minimum interest nity found in the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706,
rules and installment specifically, 5 U.S.C. § 702. Though, with some exceptions, the APA waives sovereign
sales of farmland immunity, it does not confer jurisdiction. However, because the district courts
among family possess general federal question jurisdiction under 28 U.S.C. § 1331, most farm
program litigation in the federal district courts has been premised on both the APA
members and general federal question jurisdiction. As to the sope of review, APA § 706
provided the standards. See 5 U.S.C. § 706.
• UCC articles 7 and 9 Premising an action in a district court on the APA’s waiver of sovereign immunity
versus the Federal and general federal question jurisdiction has not been trouble-free, however. Two
Warehouse Receipt difficulties have arisen. First, if the complaint expressly sought an award of the
program payments allegedly improperly denied, the government routinely moved to
Act dismiss the action or to transfer it to the Court of Federal Claims (formerly the Court
of Claims) if the payments exceeded $10,000. Under the so-called “Big” Tucker Act,
Solicitation of articles: All AALA 28 U.S.C. § 1491, which both confers jurisdiction and waives the federal government’s
members are invited to submit sovereign immunity, the Court of Federal Claims has exclusive jurisdiction over
articles to the Update. Please in- claims based in contract where the amount of monetary relief sought exceeds
$10,000. Under the so-called “Little” Tucker Act, 28 U.S.C. § 1346(a)(2), the district
clude copies of decisions and leg-
C ontinued on page 2
islation with the article. To avoid
duplication of effort, please no-
tify the Editor of your proposed
article. Reepor
por Unified
t on the Unif Strate
ied National Str ateg
ate gy
for Animal FFeeding Operations
eeding Oper ations
IN FUTURE On March 9, 1999, the U.S. Department of Agriculture and the Environmental
Protection Agency set forth their Unified National Strategy for Animal Feeding
Operations (Strategy) aimed at addressing water pollution and public health

I SSUES impacts from animal feeding operations (AFOs). This Strategy announces a set of
guiding principles suggesting further government activity with mandatory and
voluntary programs regarding AFOs. While the Strategy does not delineate a federal
regulation or serve as a substitute for existing regulations, it sets the stage for
appropriate actions to reduce environmental degradation from AFOs.
• The Biosafety A perusal of the guiding principles of this Strategy identifies priorities and areas
Protocol and the of possible governmental involvement.
1. The government seeks to minimize water quality and public health impacts
Cartegena from AFOs, with a focus on AFOs that represent the greatest risks to the environ-
Negotiations ment and public health.
2. The government seeks to make appropriate use of diverse tools including
voluntary, regulatory, and incentive-based approaches that complement the long-
Continued on page 3

courts possess concurrent jurisdiction e.g., Justice v. Lyng, 716 F. Supp. 1570 Characterizing § 6999 as a waiver of
with the Court of Federal Claims over (D. Ariz. 1989). In other words, if the sovereign immunity, the D.C. Circuit thus
such actions only if the monetary award payments in dispute exceeded $10,000, had to decide the extent of its waiver.
sought does not exceed $10,000. Given the government often maintained that More specifically, it had to decide whether
the costs of litigation, very few actions district court jurisdiction was lacking, the waiver was broad enough to encom-
seeking less than $10,000 have been even if the complaint did not expressly pass the plaintiff’s express demand for
brought in district court, and when the seek payment in the form of “money an award of approximately $95,000 in
complaint has sought more than $10,000 damages.” program payments.
the government usually has been suc- Whether in fact or in effect a complaint For the D.C. Circuit, the issue turned
cessful in dismissing or transferring the seeks “money damages” is significant on the meaning of the phrase “in accor-
case. See Divine Farms, Inc. v. Block, 679 because the APA § 702 does not waive dance with chapter 7 of Title 5,” a refer-
F. Supp. 867 (S.D. Ind. 1988). sovereign immunity for actions seeking ence to the APA. Noting that the APA
Second, even if the complaint did not “money damages.” See 5 U.S.C. § 702. In contains both limits on reviewability (e.g.,
seek a monetary award but instead addition, APA § 704 contains another §§ 702 and 704) and scope of review
sought only a declaratory judgment pur- exception that applies to claims for which standards (§ 706), the court found that
suant to 28 U.S.C. §§ 2201 and 2202 an “adequate remedy” exists elsewhere. this language in § 6999, standing alone,
declaring that the plaintiff was eligible See 5 U.S.C. § 704. In Bowen v. Massa- allowed at least three plausible interpre-
or entitled to the payments sought, the chusetts, 487 U.S. 879 (1988), however, tations:
government often moved to dismiss or to the Supreme Court held that an action To say, as § 6999 does, that final deter-
transfer the action. In such cases the for “money damages” does not include a minations of the NAD are reviewable
government contended that, in effect, the declaratory judgment and injunction ac- by the district court “in accordance
action was for money damages in excess tion challenging the denial of federal with” the judicial review provisions of
of $10,000 since compliance with the entitlement payments, specifically, Med- the APA is to say one of three things: (i)
judgment would require payment. See, icaid reimbursements to a Medicaid pro- that the NAD determinations are re-
vider. It also ruled that such an action viewable to the extent allowed by §§
was not barred by APA § 704 because the 702 and 704 of the APA; (ii) that NAD
Tucker Act did not provide an “adequate determinations are reviewable under
remedy,” in part because it authorizes the procedures set forth in § 706 of the
only very limited injunctive relief. The APA; or (iii) that NAD determinations
rationale in Bowen was subsequently are reviewable pursuant to all of the
applied to federal farm program pay- judicial review provisions of the APA.
ments by the D.C. Circuit in Esch v.
Yeutter, 876 F.2d 976 (D.C. Cir. 1989). 162 F.3d at 1211.
Nonetheless, following the Bowen and Faced with an ambiguous statute, the
VOL. 16, NO. 5, WHOLE NO. 186 April 1999 Esch decisions, the government persisted court found little guidance in the legisla-
AALA Editor..........................Linda Grim McCormick
in seeking the dismissal or transfer of tive history of § 6999 as to its intent. In
Rt. 2, Box 292A, 2816 C.R. 163 declaratory judgment actions in which fact, it concluded that the legislative his-
Alvin, TX 77511 the payments in dispute exceeded tory was as ambiguous as the statute
Phone: (281) 388-0155
FAX: (281) 388-0155 $10,000. itself because the committee report ac-
E-mail: In 1994, Congress authorized the Sec- companying the bill contained only the
Contributing Editors: Terence J. Centner, The retary to create the USDA NAD. The following explanation of § 6999:
University of Georgia, Athens, GA; Susan A. Schneider, statutory authorization for the USDA This section provides that a final de-
University of Arkansas, Fayetteville, AR; Christopher
R. Kelley, University of Arkansas, Fayetteville, AR;
NAD provided as follows: termination of the [National Appeals]
Roger A. McEowen, Kansas State University; Drew L. A final determination of the [National Division can be appealed to a U.S.
Kershen, Norman, OK. Appeals] Division shall be reviewable District Court. Analysis of which is-
For AALA membership information, contact
William P. Babione, Office of the Executive Director, and enforceable by any United States sues are subject to judicial review shall
Robert A. Leflar Law Center, University of Arkansas, district court of competent jurisdiction conform with provisions of the Admin-
Fayetteville, AR 72701.
in accordance with chapter 7 of Title 5. istrative Procedure Act (APA).
Agricultural Law Update is published by the
American Agricultural Law Association, Publication
office: Maynard Printing, Inc., 219 New York Ave., Des
7 U.S.C. § 6999. The meaning of this Id. at 1212 (quoting S. Rep. No. 103-241,
Moines, IA 50313. All rights reserved. First class provision, § 6999, was at issue in Deaf at 15 (1994). Though it found the first
postage paid at Des Moines, IA 50313. Smith County Grain Processors decision. sentence “quite straightforward,” the
This publication is designed to provide accurate and The plaintiff in Deaf Smith County court could not find a clearly discernable
authoritative information in regard to the subject Grain Processors commenced an action expression in the report’s second sen-
matter covered. It is sold with the understanding that
the publisher is not engaged in rendering legal, in district court expressly seeking ap- tence as to whether the APA’s limit on
accounting, or other professional service. If legal advice proximately $95,000 in acreage reduc- review found in § 704, for example, was
or other expert assistance is required, the services of
a competent professional should be sought.
tion program and disaster program pay- applicable.
Views expressed herein are those of the individual ments that it claimed had been improp- Faced with both an ambiguous statute
authors and should not be interpreted as statements of erly denied to it. The final administrative and ambiguous legislative history, the
policy by the American Agricultural Law Association.
determination had been made by the court then examined the recent history of
Letters and editorial contributions are welcome and USDA NAD, thus § 6999 applied. Though farm program litigation, focusing on the
should be directed to Linda Grim McCormick, Editor,
Rt. 2, Box 292A, 2816 C.R. 163, Alvin, TX 77511. the district court granted summary judg- “numerous ‘thorny and frustrating’ juris-
ment on the merits in the Secretary’s dictional disputes” over whether such
Copyright 1999 by American Agricultural Law
Association. No part of this newsletter may be
favor, an issue on appeal was whether actions should be brought in the district
reproduced or transmitted in any form or by any means, the district court possessed jurisdiction courts under the APA’s waiver of sover-
electronic or mechanical, including photocopying, over the action. More broadly stated, the eign immunity or in the Court of Federal
recording, or by any information storage or retrieval
system, without permission in writing from the issue was whether Congress intended by Claims pursuant to the Tucker Act’s
publisher. enacting § 6999 to end the litigation over waiver of sovereign immunity. It con-
the proper forum for the judicial resolu- cluded that it was “[a]gainst this back-
tion of farm program disputes. Cont. on p.3

Report/Continued from page 1 CNMPs are expected to address feed assistance as needed from government
term sustainability of livestock produc- management, manure handling and stor- agency specialists, private consultants
tion in the United States. age, land application of manure, land and other qualified vendors.
3. Through regulations, the govern- management, record keeping, and man- The Natural Resources Conservation
ment proposes to establish a national agement of other utilization options. They Service Field Office Technical Guide is
goal and environmental performance ex- will be site-specific, written to address the primary technical reference for the
pectation for all AFOs. the goals and needs of the individual development of CNMPs for AFOs. This
4. The government seeks to focus tech- owner/operator, and revised whenever a Technical Guide contains technical in-
nical and financial assistance to support facility increases in size or changes its formation about utilization and conser-
AFOs in meeting the national perfor- method of manure management. After vation of soil, water, air, plant, and ani-
mance expectation established in this considering the pertinent factual infor- mal resources, and is localized to con-
Strategy. mation, a CNMP can embody a schedule sider particular characteristics for the
to implement management practices that geographic area for which it is prepared.
A national performance expectation protect water quality and public health. It is intended that CNMPs encourage
that all AFOs should implement an eco- CNMPs are expected to be mandatory and facilitate technical innovation and
nomically feasible Comprehensive Nu- for less than five percent of AFOs, those new approaches to manure and nutrient
trient Management Plan (CNMP) is the subject to an National Pollutant Dis- management.
underlying basis for the Strategy. A charge Elimination System permit un- —Terence J. Centner, The University
CNMP identifies actions or priorities that der the Clean Water Act, and voluntary of Georgia, Athens, GA
will be followed to meet clearly defined for other AFOs. The development and
nutrient management goals at an agri- implementation of a CNMP are the re-
cultural operation. sponsibilities of the AFO operator, with

Shor extension
t term Chapter 12 e xtension — again
On March 30, 1999, Congress once again fied at 11 U.S.C. §§ 1201 - 1231). Origi- There appears to be substantial sup-
passed a short term extension to the nally, it had a sunset provision that port in Congress for legislation that would
provisions of Chapter 12 of the Bank- provided for repeal on October 1, 1993. make Chapter 12 a permanent part of the
ruptcy Code, 11 U.S.C. §§ 1201-1231. Pub. L. No. 99-554, tit. III, § 302(f), 100 Bankruptcy Code. See 145 Cong. Rec.
Extension of Reenactment of Chapter 12, Stat. 3088, 3124 (1986). On August 6, H1033-36 (daily ed. Mar. 9, 1999) (state-
Family Farmers Indebtedness, Pub. L. 1993, Chapter 12 was extended for an- ments of Rep. Gekas, Rep. Baldwin, Rep.
No. 106-5, 113 Stat. 9 (1999). This exten- other five years. Pub. L. No. 103-65, 107 Bereuter, Rep. Etheridge, Rep. Smith,
sion provides that Chapter 12 will re- Stat. 311 (1993). Chapter 12 officially Rep. Nadler, Rep. Jackson-Lee). This
main available to eligible family farmers sunset on October 1, 1998, but it was legislation, however, has become mired
until October 1, 1999. resurrected with a six month retroactive in the controversial bankruptcy reform
Chapter 12, Adjustment of Debts of a extension as part of an omnibus appro- issue. Proponents of pending reform
Family Farmer with Regular Annual priations bill passed later in October. legislation have sought to tie the
Income, was first enacted in October 1986. Omnibus Consolidated and Emergency permancy of Chapter 12 to this reform.
Bankruptcy Judges, United States Trust- Supplemental Appropriations Act, Pub. —Susan A. Schneider,
ees and Family Farmer Bankruptcy Act L. 105-277, div. C, tit. 1, § 149, 112 Stat. Assistant Professor of Law,
of 1986, Pub. L. No. 99-554, tit. II, § 255, 2681, 2681-610-11 (1999). This extension University of Arkansas
100 Stat. 3088, 3105-3113 (1986) (codi- was set to expire on April 1, 1999.

NAD Appeals/Cont. from page 2
drop” that Congress created the “‘new’” held that the district court had jurisdic- clear.
NAD in 1994, replacing its predecessor, tion over the case. On the merits, how- —Christopher R. Kelley, Assistant
the ASCS NAD. Id. at 1213. The court ever, the court affirmed the district court. Professor, University of Arkansas
then reasoned that Congress probably If followed in the other circuits, the School of Law. Of Counsel,
intended to remedy the jurisdictional con- Deaf Smith County Grain Processors de- Vann Law Firm, Camilla, GA
fusion “that reigned prior to the creation cision will have closed a chapter in fed-
of the new NAD....” Id. That is, in the eral farm program litigation. The only
court’s words, “although the evidence is forum for the review of USDA NAD de-
not overwhelming and the language of terminations, by choice or otherwise, will
the statute is far from unambiguous, it be the federal district courts, even if the
appears that the purpose of § 6999 was to complaint expressly seeks the program
simplify appeals from the NAD by plac- payments allegedly improperly denied.
ing jurisdiction over them solely in the However, as the decision makes evident,
district court.” Id. Accordingly, the court the intent of § 6999 is not altogether

Minim interest
um inter rules
est rules and installment sales of f farmland
among ffamil
amil members
y member s— what is a f
fair mark
air mar rate
ket r intere
ate of inter for
est f or
gift tax purposes?
By Roger A. McEowen
family members), the Congress has speci- discounting the value of the compensa-
Overview of the problem fied minimal limits on interest rates for tion the seller receives over the contract
It is believed that a large amount of installment sale obligations to prevent term by the interest rate established in
farm and ranch assets will change hands sellers from converting what would oth- the contract.
in the next decade. Undoubtedly, some of erwise be ordinary income into capital Before legislation enacted in 1984, the
the transfers will involve sales and other gain. Service announced that, for interest-free
types of dispositions among family mem- demand loans made before 1984, donors
bers. Several options exist for the trans- Minimum interest rules and the I.R.C. could compute the value of the gifts by
fer of agricultural real estate during life. § 483 safe harbor using the I.R.C. § 6621 rate or the aver-
For instance, the land could be trans- If the minimum interest rules are trig- age annual rate for three-month Trea-
ferred under a private annuity arrange- gered and the sale results in capital gain sury Bills.20 For term loans made after
ment,1 by means of a self-canceling in- to the seller, a part of each principal June 6, 1984, and demand loans out-
stallment note, by virtue of a cash trans- payment is treated as interest rather standing on June 6, 1984 (except for
action with the proceeds then reinvested than principal and the total sales price is demand loans repaid within 60 days af-
in other assets, or the land could be sold correspondingly reduced.7 Section 483(e) ter July 18, 1984), low-interest and no-
in a transaction qualifying for install- fixes imputed rates for qualified intra- interest loans are treated as arm’s length
ment reporting of gain.2 If the residence family installment sales of real estate at transactions.21 Interest-free and low-in-
is sold with the land, the gain on sale six percent. The six percent rate may be terest demand gift loans outstanding af-
attributable to the residence may be eli- used for sales of less than $500,000 in one ter June 6, 1984, are subject to the rules
gible for exclusion.3 calendar year between related parties.8 of I.R.C. § 7872. The rules apply to gift
While there are numerous factors to If the sale produces ordinary income only, loans, compensation-related loans, cor-
consider when selling farm or ranch land the minimum interest rules do not ap- porate-shareholder loans, tax avoidance
during life,4 one factor that may be ply,9 and the purchaser is entitled to loans and other types of loans with inter-
overlooked is the gift tax implication deduct a portion of each payment as est charged below the applicable federal
upon installment sale of the farmland to interest and no interest amount is im- interest rate.22 For gift loans, where the
family members if the interest rate speci- puted to the seller.10 The purchaser must interest foregone is in the nature of a gift,
fied in the contract is deemed by the reduce the income tax basis in the asset uncharged interest on interest-free or
Internal Revenue Service (Service) to be by the total amount allocated to interest below market interest rate loans repre-
inadequate. A recent decision of the during the term of the obligation.11 How- sents a transfer by gift to which federal
Federal District Court for the Northern ever, if the gain on sale is capital gain, the gift tax provisions apply. In essence, the
District of New York5 has again raised minimum interest rules apply,12 and a maker of a demand loan is deemed to
the question of what rate of interest in portion of each payment is treated as have made an annual gift of the un-
such contracts avoids the creation of a additional interest with a corresponding charged interest up to the statutory fed-
gift. reduction in principal.13 In that event, eral rate. The maker of a term loan is
the additional interest amount is a de- considered to have made a gift on the
Interest rate sensitivity duction for the purchaser, and the date of the loan equal to the excess of the
The interest rate selected for install- purchaser’s income tax basis in the asset loan amount over the present value of all
ment sale obligations is important to is reduced by the amount considered to payments required to be made under the
both sellers and buyers. Sellers gener- be interest expense.14 terms of the loan. Uncharged interest is
ally prefer a lower interest rate coupled imputed as income to the lender and as a
with a higher sale price. Interest is tax- Gift tax implications of I.R.C. § 483? deductible expense to the borrower.23 For
able as ordinary income, but the addi- A significant question is whether the gift tax purposes, a term loan is deemed
tional gain from the higher sales price is minimum interest rules of I.R.C. § 483 to be a demand loan. Historically, I.R.C.
taxable as capital gain.6 Buyers, on the apply for gift tax as well as income tax § 483 has provided a safe harbor at a
other hand, tend to prefer higher interest purposes. The federal gift tax is imposed lower discount than the I.R.C. § 7872
rates and a lower selling price. Interest on outright gifts made during life.15 For rates. While I.R.C. § 7872 generally
is income tax deductible, but principal example, an option for purchase of land applies to the income, gift and estate tax
payments are nondeductible except to at less than fair market value that is treatment of loans, it expressly does not
the extent the principal payments repre- enforceable under state law is a gift at on its face apply to transactions covered
sent depreciable or depletable property. the time the option is transferred.16 Like- by I.R.C. § 483 and to installment sale
Thus, in situations where the seller’s wise, the gratuitous transfer of a legally contracts subject to I.R.C. § 1274.24
objectives dominate the negotiation pro- binding promissory note is a completed
cess (which may be likely in situations gift.17 Even interest-free loans payable Caselaw developments
where both the seller and the buyer are on demand to family members have been In a case arising before the 1984 legis-
held to be subject to federal gift tax.18 The lation creating I.R.C. § 7872, the seller
value of a gift is the difference between entered into a contract with the seller’s
Roger A. McEowen is Associate Professor the fair market value of the property three children with the contract provid-
of Agricultural Law at Kansas State transferred and the consideration re- ing that the children would each receive
University. ceived.19 For installment contracts, the a one-third interest in her 286-acre farm.25
computation of the gift, if any, requires The farm’s fair market value was

$582,000. The contract specified a I.R.C. § 483 operates to recharacterize to an irrevocable trust created for the
$386,000 selling price and a six percent certain amounts of installment or de- benefit of her lineal descendants. Pursu-
interest rate. The seller filed a gift tax ferred payments as interest and was ant to the sale agreement, the trust was
return reporting a gift of the difference irrelevant for gift tax valuation purposes33 to pay the purchase price in eighty equal
between the fair market value of the The Eighth Circuit affirmed, noting that quarterly installments, and to pay inter-
farm and the face value of the consider- the Service may rely on rates for similar est with each quarterly installment on
ation the seller was to receive from the transactions and that the rate at the the unpaid balance of the purchase price
children under the contract. The seller Minnesota office of the Federal Land at six percent per annum. The prevailing
covered the resulting gift tax with uni- Bank at the time was 10.75 percent34 market rate for a twenty-year note at the
fied credit and reported zero gift taxes Also, neither the Seventh Circuit in time of sale was 8.8 percent. The Service
due. The Service issued a notice of defi- Ballard or the Eighth Circuit in concluded that the installment sale at
ciency, determining that the discounted Krabbenhoft took into account the legis- the lower rate constituted a taxable gift,
value of the consideration the seller was lative history of I.R.C. § 483 indicating and the court agreed.
to receive under the contract was only congressional intent that the I.R.C. §
$134,298.20 because the market rate of 483(e) safe harbor should apply for estate Estate planning implications
interest was 18% rather than the six and gift tax as well as income tax pur- It appears that there is little room to
percent contract rate.26 Thus, the Ser- poses.35 argue (outside the Seventh Circuit) that
vice argued that the difference between In Frazee v. Commissioner36 a case the six percent safe harbor rate of I.R.C.
the market value of the property and the involving a tax year after enactment of § 483 applies for gift tax valuation of an
discounted value of the contract at 18% I.R.C. § 7872, the taxpayers sold 12.2 installment contract. Thus, a market
represented an actual gift of $437,701.80 acres of improved real property to their rate of interest must be utilized to avoid
to the children. children for a note bearing six percent the creation of a gift upon execution of the
In the Tax Court, the seller argued that interest and payable in twenty annual contract, with the rate tied to the Appli-
I.R.C. § 483 provided a “safe harbor” installments.37 The Tax Court stressed cable Federal Rate as specified monthly
permitting the use of a six percent rate of that in valuing the contract for gift tax in accordance with I.R.C. § 7872. When
interest on the contract without either purposes, the appropriate discount rate market rates in the economy again rise
income or gift tax consequences.27 The is supplied by I.R.C. § 7872 rather than significantly above the six percent level,
Service disagreed, contending instead I.R.C. § 483 or I.R.C. § 1274. The court an incentive may be present to utilize a
that I.R.C. § 483 applied only to income noted that I.R.C. § 7872 applied specifi- below-market rate of interest, especially
taxes. The Tax Court agreed with the cally to gifts and that both I.R.C. § 483 in contracts involving family members.
Service, but the Seventh Circuit reversed and I.R.C. § 1274 applied only to income In that event, one option may be to utilize
on appeal.28 The Seventh Circuit based tax issues. While the court noted that the a variable rate of interest tied to an index
its reversal upon the use of the language Service’s proposed regulations under such that a market rate comparable to
in I.R.C. § 483(a) stating that the section I.R.C. § 483 specifically allowed the six the Service’s rate is assured. Indeed, this
applied “for purposes of this title” The percent safe harbor interest rate for gift may be the only way for taxpayers engag-
court construed the word “title” as a tax purposes38 the court stated that it ing in long-term installment sales during
reference to all provisions of the Internal considered proposed regulations as no periods of high rates to complete a trans-
Revenue Code (title 26 of the U.S. Code). more than a litigation position and that action in a manner that is both affordable
Thus, any qualified sale satisfying the the Service had later abandoned the po- for the buyer and safe from gift tax as-
requirements of I.R.C. § 483 could utilize sition that it had taken in the proposed sessment.
the six percent safe harbor rate of I.R.C. regulations in a General Counsel’s Memo- In any event, installment sales should
§ 483(e)(1) for both income and gift tax randum39 Accordingly, the Tax Court held be routinely reviewed for potential gift
purposes.29 that the value of promissory note had to tax exposure and the related reduction in
In another case involving a tax year be recomputed using the federal rate for the seller’s unified credit. Also, estate
before enactment of I.R.C. § 7872, a Min- long-term loans compounded semi-annu- tax consequences should be considered.
nesota farm couple transferred land to ally, with quarterly payments at the time In the Seventh Circuit, arguably the full
their sons by means of a contract for the taxpayers conveyed the property to face value of the contract is taxable for
deed.30 The contract provided for a pur- their children.40 At the time, the appli- estate tax purposes without discount for
chase price of $400,000, an interest rate cable federal rate was substantially the difference between the six percent
of six percent and thirty annual pay- higher than six percent. rate and the prevailing market rate at
ments of $29,060. The parents, relying In Schusterman v. United States41 an- the time the contract was entered into.
on the Seventh Circuit’s opinion in other case involving a transaction en- Elsewhere, it appears that installment
Ballard,31 argued that even if I.R.C. § 483 tered into before the enactment of I.R.C. contracts will be valued at fair market
did not apply, that the Service had incor- § 7872, the Tenth Circuit followed the value for both estate and gift tax pur-
rectly used an eleven percent interest Eighth Circuit’s opinion in Krabbenhoft poses.
rate to determine the 1981 present value and held that donors may not rely on the
of the contract because a six percent rate I.R.C. § 483 safe harbor for gift tax pur- See generally 7 Harl, Agricultural
was consistent with rates for similar poses. The case involved the valuation of L a w, Ch. 49 (1998).
types of transactions at the time. The gifts resulting from transfers of stock to I.R.C. section 453.
Tax Court disagreed with the parents on trusts in exchange for promissory notes. I.R.C. section 121. Legislation has
both point32 In addition, the Tax Court The Schusterman court determined that been proposed that would broaden the
expressly refused to follow the Seventh such gifts are demand loans and utilized scope of I.R.C. § 121 to provide an exclu-
Circuit’s opinion in Ballard, determining the IRS rate of 11.5% in accordance with sion for gain attributable to the sale of
that Ballard was wrongly decided and Rev. Proc. 85-46.42 farmland. "Qualified farm property" is
noting that the present case was not In the most recent case involving the defined as any real property located in
appealable to the Seventh Circuit. On issue43 the taxpayer, in 1979, sold 6,894 the United States that the taxpayer or
appeal, the Eighth Circuit Court of Ap- shares of common capital stock for a
peals affirmed the Tax Court, noting that purchase price of slightly over $1 million Continued on page 6

member of the family used as a farm for transfers for inadequate consideration 63 F.3d 986 (10th Cir. 1995).
farming purposes and the taxpayer or constitute gifts for gift tax purposes. See, 1985-2 C.B. 508. Under Rev. Proc.
family member materially participated e.g., Commissioner v. Wemyss, 324 U.S. 85-46, a taxpayer may value the gift
in the farm's operation for at least three 303 (1945); Merrill v. Fahs, 324 U.S. 308 resulting from an interest-free loan by
out of five years immediately preceding (1945). multiplying the average outstanding loan
the date of sale. H.R. 1503, 106th Cong. I.R. 84-60, May 11, 1984. balance for the calendar period by the
1st Sess. ___ (1999). Tax Reform Act of 1984, Sec. 172, difference between the rate of interest on
These factors include the projected 98th Cong., 2d Sess. (1984). the loan and the interest rate for the
income tax liability upon sale, the poten- See, e.g., Kta-Tator, Inc., 108 T.C. applicable year provided in the table.
tial effects of inflation (or deflation) on 100 (1997)(demand loans made by closely- Lundquist v. United States, No. 1:96-
income and principal from the sale, the held corporation to sole shareholders to CV-0725, 1999 U.S. Dist. LEXIS 3042
desirability of "freezing" the landowner's build facilities to be leased to corpora- (N.D. N.Y. Feb. 23, 1999).
estate, the landowner's willingness to tion; each advance treated as separate
manage the property, and the qualifica- loan and subject to below-market inter-
tion requirements for post-mortem plan- est rate.
ning techniques as well as certain other There is an exclusion for loans if the
noneconomic factors. aggregate outstanding amount of all loans Art
UCC Ar cles
ticles 7 & 9
Lundquist v. United States, No. 1:96- from the lender to the borrower does not
CV-0725, 1999 U.S. Dist. LEXIS 3042 exceed $10,000 and if the proceeds of the versus
versus the FFeder
eder al
(N.D. N.Y. Feb. 23, 1999). loan are not used to buy incomd produc-
For sales after May 6, 1997 and before ing assets. I.R.C. § 7872(c)(2). arehouse
W arehouse Receipt
July 29, 1997, for property held more Section 7872(f)(8); Prop. Treas. Reg.
than one year, individuals in the 15% § 1.7872-2(a)(2)(ii). Act
marginal income tax bracket are subject Ballard v. Commissioner, 854 F.2d In 1997, Thomas Hendrix of Statesboro,
to a 10% capital gain rate while those in 185 (7th Cir. 1988). Georgia grew his cotton using a loan from
higher brackets are subject to a 20% rate. Because the Service determined that Agricredit Acceptance LLC. In making
For sales after July 28, 1997 and before the market rate of interest was 18%, the the loan, Agricredit took a perfected se-
January 1, 1998, involving property held Service discounted the $386,000 selling curity interest against the cotton. [Ga.
more than one year, but eighteen months price to reflect an 18% interest rate. As a Stat. §§ 11-9-203 and 11-9-401.]
or less, the capital gain tax rate is 15% for result, the discounted value of the con- Agricredit also filed direct notice with
those in the 15% tax bracket and 28% for sideration the mother was to receive un- Sea Island Cotton Trading Company to
those in higher brackets. For property der the contract was $134,298.20. protect its security interest in the Hendrix
held more than eighteen months, the T.C. Memo. 1987-128. cotton against buyers, commission mer-
capital gain tax rate is 10% for those 854 F.2d 185 (7th Cir. 1988). chants, and selling agents. [7 U.S.C. §
persons in the 15% tax bracket and 20% I.R.C. section 483(e)(2) specifies that 1631.]
for those in higher brackets. For sales a qualified sale is any sale or exchange of When Hendrix harvested his cotton,
after December 31, 1997, for individuals land by an individual to a member of such warehouses stored the cotton under elec-
in the 15% marginal income tax bracket individual's family. tronic warehouse receipts as authorized
and for property that has been held more Krabbenhoft v. Commissioner, 939 by federal law. [7 U.S.C. §259.] Sea
than one year, the applicable long-term F.2d 529 (8th Cir. 1991). Island purported to sell the Hendrix cot-
capital gain tax rate is 10%. For those 854 F.2d 185 (7th Cir. 1998). ton to various cotton merchants. Shortly
individuals in higher marginal brackets, Krabbenhoft v. Commissioner, 94 thereafter, Sea Island Cotton went bank-
the applicable long-term capital gain tax T.C. 887 (1990). rupt.
rate is 20%. Krabbenhoft v. Commissioner, 939 Agricredit filed a law suit seeking to
I.R.C. § 483. F.2d 529 (8th Cir. 1991). foreclose against the Hendrix cotton, to
8 34
I.R.C. § 483(e). Interestingly, the Eighth Circuit in enjoin the transfer of the Hendrix cotton
I.R.C. § 483(f)3). See also Rev. Rul. Krabbenhoft did not consider the issue of from the warehouses to the cotton mer-
82-124, 1982-1 C.B. 89. whether the gift under the contract was chants, and for conversion and damages
Treas. Reg. § 1.483-2(b)(3)(ii). "up front" and was a present interest or for any Hendrix cotton that the cotton
Rev. Rul. 82-124, 1982-1 C.B. 89. was a future interest. However, in Deal merchants had already received from the
Treas. Reg. § 1.483. v. Commissioner, 29 T.C. 730 (1958), an warehouses.
See Rev. Rul. 82-124, 1982-1 C.B. 89. installment sale with forgiveness of all In response to the Agricredit law suit,
Id. payments was deemed to be a gift ab the cotton merchants sought a summary
See, e.g., Warda v. Commissioner, initio and was a future interest. judgment claiming that the United States
T.C. Memo. 1992-43, aff'd, 15 F.3d 533 See Conf. Rep. to ERTA and H.R. Federal Warehouse Act provision autho-
(6th Cir. 1994), cert. denied, 513 U.S. 808 Rep. No. 215, 97th Cong., 1st Sess. 281 rizing electronic warehouse receipts pre-
(1994)(gifts at time deeds to farmland (1981). empted Agricredit’s claims under Article
executed and recorded rather than on 98 T.C. 554 (1992). 9 of the Georgia Uniform Commercial
earlier execution of contract; but gift The sellers had been growers and Code. The cotton merchants argued that
occurred on execution of contract for one worldwide distributors of flower bulbs 7 U.S. C. § 259 provided the only method
parcel because of indication donor in- for more than 50 years and wished to for determining possessory rights in cot-
tended to then give up dominion and retire from the flower farming business. ton.
control). Treas. Reg. § 1.483-(b)(2). In Agricredit Acceptance, LLC v.
16 39
Rev. Rul. 80-186, 1980-2 C.B. 280. G.C.M. 39,566 (Oct. 23, 1986)(tax- Hendrix, 1998 U.S. Dist. LEXIS 20595,
Rev. Rul. 84-25, 1984-1 C.B. 191. payer conveyed farm to children in 1981 1998 WL 928547 (S.D. Ga.), the District
See Dickman v. Commissioner, 465 in a part sale, part gift transaction re- Court ruled against the cotton merchants.
U.S. 330 (1984). ceiving a note payable over a fixed term Judge John Nangle ruled that Congress
Because gift taxation seeks to avoid of years with interest at six percent. did not intend to preempt the UCC when
untaxed depletion of the donor's estate, See I.R.C. § 7872(f)(2)(A). it passed 7 U.S.C. § 259 authorizing
C ontinued on page 7

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corporate farming/family farm pres- Substantive Timber Management Provi- —Drew L. Kershen, Professor of Law,
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Environmental issues Comment, Mad cows, Offended Emus, Federal Warehouse Act to allow state
Batie & Ervin, Will Business-led Envi- and Old Eggs: Perishable Product Dis- UCC law to control the priority between
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pacts on Environmental Protection: A Look the dispute between Agricredit’s Article
at Isolated Wetlands Regulation, 4 W.-Nw. Organizational orms for agriculture 9 security interest and the cotton mer-
187-202 (1998). (business law & development) chants’ claim to the cotton based on the
General electronic warehouse receipts, Judge
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Collective bargaining Farm, 41 J.L. & Econ. 343-386 (1998). court provided insufficient evidence to
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