03 Aug August Digital Fruit Short Takes
Kings River Commodities, LLC, a livestock feed business, was denied $2.83 million in deductions for captive insurance expenses. In a U.S. Tax Court petition, dated May 11, 2017, the company argues that these expenses were necessary to cover its unique business risks while selling feed for poultry and dairy cattle. Some of these risks include spoilage or contamination of the product, reliance on supplies from human food manufacturers, environmental hazards, and the increasing burdens of state and federal regulations. While commercial insurers cannot fully cover all of these risks, a “captive” arrangement allowed the company to form its own insurance company that issues policies for those traditionally underinsured and uninsured risks. The IRS alleges, however, that this particular company’s self-insurance transactions did not fall within the ordinary course of its livestock feed business and lacked economic substance.
Farmers and biotechnology companies rejoiced this summer when China approved U.S. imports of genetically engineered corn and soybean varieties from Dow Chemical and Monsanto. As the largest importer of soybeans and major purchaser of corn, China’s blessing will drive seed companies to widely release and distribute new genetically engineered seeds to other parts of the world. Without China’s blessing for such imports, seeding companies would be reluctant to widely distribute the genetically engineered seeds to farmers in North and South America who can use the seeds to combat hard-to-kill weeds and fend off destructive pests. The recent approval stems from the government’s current struggles to strike a balance between its desire to boost farm productivity to support its growing middle class and the Chinese citizens’ mistrust of genetically engineered seeds. Although the approval is only applicable to the import of seeds, and not to the planting of the seeds themselves, U.S. companies are hopeful that this signifies China’s inevitable acceptance of genetically modified crops.
In June 2017, Maine passed a law granting cities and towns in the state the option to deregulate a significant amount of food production and sales within its borders. This law, also called a “food sovereignty law,” applies only to food and food products grown, produced, or processed by local vendors who sell directly to consumers, and does not preempt federal laws regulating food production and sales. In Maine, the food sovereignty movement started as a result of the passage of a state law that required farmers with small operations to comply with costly food processing requirements. The benefits of the new food sovereignty law are two-fold in that it gives local residents the ability to buy and sell foods produced locally without interference from federal or state laws, and unshackles small producers from having to comply with stringent and costly food processing requirements.
Generally, a grower may sell some of his land in order to generate cash and pay creditors. This can result in a substantial capital gains tax, however, where downsizing may actually put the grower out of business if he is unable to pay the resulting tax obligation in full. Bipartisan legislation introduced in the U.S. Senate might provide tax relief for these growers in a bill titled the “Family Farmer Bankruptcy Clarification Act of 2017.” This bill would change how capital gains are treated upon the sale of a farm while undergoing bankruptcy. Instead of being a priority claim that must be satisfied in full before unsecured creditors receive payments, the capital gains tax would be treated as another general unsecured claim. Similar legislation has been proposed by the Senate over the past few years but the tax relief bill has yet to make it out of committee.
PUNCHLINE: John Duarte, The Man Who Lived to Till the Story
by David Spence
In 2012, John Duarte bought California farmland, intending to plant wheat. He wanted to begin plowing immediately, so Duarte hired a consulting firm to survey the property and ensure he only plowed those areas that would not be considered “waters of the United States” under EPA rules. He plowed, then planted his wheat, but was ultimately unable to harvest the wheat, because the U.S. government forbade it and fined him $2.8 million. The fine was not because he allegedly destroyed wetlands—an unproven charge—or because he threatened the endangered fairy shrimp (yes, it’s a real thing)—also an unproven charge. The fine was imposed because Mr. Duarte failed to obtain a permit from the U.S. Government before plowing his own land. He’s now in protracted litigation with the U.S. Government. In August, we may find out what happens with his latest appeal. The moral of this story is that you never know when you may need a license to till.