Business and Financial

UPDATE:  Governor DeWine signed H.B. 95, the Beginning Farmer bill, on April 18, 2022.  The effective date for the new law is July 18, 2022.  The Governor signed the Statutory Lease Termination bill, H.B. 397, on April 21, and its effective date is July 19, 2022.

Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week.  Predictions are that the Governor will sign both measures.

Statutory termination requirements for farm leases – H.B. 397

Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination.  The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations by landowners.  It will change how landowners conduct their farmland leasing arrangements, and will hopefull encourage written farmland leases that clearly address how to terminate the leasing arrangement.

The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1.  The termination would be effective either upon completion of harvest or December 31, whichever is earlier.  Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement.  A lease that addresses how and when termination of the leasing arrangement may occur would also be unaffected by the new provisions.

The beginning farmer bill – H.B. 95

A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville).  It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.

The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.”  A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income.  The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement.  It also allows a carry-forward of excess credit up to 7 years.  Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.

The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program.  The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State.  The farmer may carry the tax credit forward for up to three succeeding tax years.

Who is a certified beginning farmer?  The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture.  One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers.  Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset. 

An individual can become certified as a beginning farmer if he or she:

• Intends to farm or has been farming for less than ten years in Ohio.
• Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
• Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
• Provides the majority of day-to-day labor and management of the farm.
• Has adequate knowledge or farming experience in the type of farming involved.
• Submits projected earnings statements and demonstrates a profit potential.
• Demonstrates that farming will be a significant source of income.
• Participates in a financial management program approved by the Department of Agriculture.
• Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.

We’ll provide further details about these new laws as they become effective.   Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here.  Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.

By Robert Moore, Research Specialist and Attorney, Agricultural & Resource Law Program

Prior to LLCs becoming available for common use, Limited Partnerships (LP) were used extensively to hold farmland.  LPs provide liability protection for the limited partners and usually allow the land to be distributed out to the partners without tax liability.  Additionally, the land in the LP can receive a stepped-up tax basis upon the death of a partner.  LPs were a good choice to hold farmland.

The primary disadvantage of an LP is the liability exposure of the general partner.  Because the general partner is tasked with management responsibilities for the LP, they receive no liability protection.  Therefore, any liability created by the activities of the LP will transfer to the general partner and put all of the general partner’s assets at risk.

LLCs were developed in the 1990’s and started to become popular in the early 2000’s.  LLCs can be taxed as partnerships and thus provide all the tax benefits of an LP.  Also, LLCs provide liability protection for all owners regardless of their management roles.  Therefore, LLCs provide all the benefits of an LP plus provide liability protection for the manager.  Due to the superior lability protection of LLCs, LPs have been made obsolete in Ohio.

If you have an LP, you should consider converting it to an LLC.  The conversion will extend liability protection to all the owners while maintaining the partnership taxation structure.  Converting from an LP to an LLC is relatively easy.

The conversion is performed by completing Form 700 provided by the Ohio Secretary of State.  The form can be filed through the mail or by submitting online.  A $99 fee is required to be paid when the conversion is submitted.  The form asks for the identification and structure of the current entity and the name and structure of the future, converted entity.

Any asset held by the LP is automatically owned by the LLC after conversion.  For real estate, an affidavit is recorded with the county recorder stating the LP has been converted to an LLC.  Because both the LP and LLC will have a partnership taxation structure, the same tax identification number can be used after the conversion.  An operating agreement should be drafted for the new, converted LLC as the old LP agreement will no longer be in effect.

Consider the following example.  XYZ Farms Ltd. is an LP and holds farmland.  The owners of the LP wish to convert to an LLC to provide liability protection for the manager partner.  Form 700 is filed with the Ohio Secretary of State along with the $99 fee.  The conversion form states that XYZ Farms Ltd. is converting to an LLC and will have the new name of XYZ Farms LLC[1].  After the conversion, the LLC files an affidavit with the county recorder stating that XYZ Farms was converted from an LP to an LLC and the farmland is now owned by the LLC.  The owners of XYZ Farms LLC draft a new operating agreement with terms and provisions applicable to an LLC.

LLCs have replaced LPs as the entity of choice to hold farmland.  LPs that were established prior to the availability of LLCs can be converted to LLCs relatively easily.  Owners of an LP should consider converting to an LLC to provide liability protection for the managing partner.

It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts.  Here’s a look at the inquiries that have come our way,

I’m considering a carbon credit agreement.  What should I look for?   Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist.  For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions.  That’s a lot!  Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”

I want to replace an old line fence.  Can I remove trees along the fence when I build the new fence?   No, unless they are completely on your side of the boundary line.  Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them.  You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence.  You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree.  Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.

I want to sell grow annuals and sell the cut flowers.  Do I need a nursery license?  No.  Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass.  A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state.  Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.

Must I collect sales tax on cut flowers that I sell?  Yes.  In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax.  That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax.  The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly.  Read more about vendor’s licenses and sales taxes in our law bulletin at this link.

I’m an absentee landowner who rents my farmland to a tenant operator.  Should I have liability insurance on the land?  Yes.  A general liability policy with a farm insurer should be affordable and worth the liability risk reduction.  But a few other steps can further minimize risk.  Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period.  Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition. 

My neighbor and I both own up to the shoreline on either side of a small lake--do I have the right to use the whole lake?  It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body.  Both of you could limit access to your side of the property line as it runs through the lake.  You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.”  You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water.   The law changes if the lake is part of a “navigable” waterway.  It is then a “water of the state” that is subject to the public right of navigation.  Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side.  Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.

If I start an agritourism activity on my farm, will I lose my CAUV status?  No, not if your activities fit within the legal definition of “agritourism.”  Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity.  The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production.  This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.

Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer.  Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.

Did you know there is a bird with talons larger than grizzly bear claws?  The Harpy Eagle’s back talons can reach lengths of 5 inches, which is larger than a grizzly bear’s claws which reach lengths of around 4 inches. Thankfully, the Harpy Eagle is not usually found in the United States, they are traditionally found in the rainforests of Central and South America.  

The variety and extent of the animal kingdom can be a good analogy when we talk about the scope and variability of agricultural and resource law.  “Ag law” isn’t in and of itself a core area of law, at least not an area of law taught in most law schools across the country.  Those core areas of law are traditionally contracts, constitutional, tort, property, and a few others.  But ag law includes most, if not all, of the core legal subjects.  This includes property law, tax law, tort law, international law, intellectual property law, environmental law, contracts, business, labor and employment, and others.  This week’s edition of the Ag Law Harvest shows you how diverse ag law really is.  We review some legislation moving in parts of the country that deal with tax law, property law, and administrative law.  We also review Federal regulations and court cases that address food law, trademark law, and antitrust law.  

Florida introduces legislation to protect farmers’ preferential tax benefits amid agritourism boom.  Florida’s legislature is hard at work to ensure the success of Florida’s agriculture and agritourism industries.   Recently, Florida’s legislature introduced Senate Bill 1186 and House Bill 717.  The purpose of both bills is to promote Florida’s agritourism industry and protect farmers when it comes to land classification, taxation, and regulation.  Both pieces of legislation look to: 

• Eliminate duplicate regulatory authority over agritourism by preventing local government from enacting regulations that prohibit, restrict, or otherwise limit an agritourism activity from taking place on land classified as agricultural land. 
• Prevent land from being classified “non-agricultural” simply because an agritourism activity takes places on the land, so long as the agritourism activity is taking place on a bona fide farm. 
• Implement a hybrid property taxation scheme which allows the buildings and other structures used for agritourism activities to be assessed at just value and added to the agriculturally assessed value of the land.  

Both bills are currently making their way through their respective chamber’s committees and should be voted on soon.  

Michigan looking to pass legislation to reduce fines for family farmers that do not report accidental workplace deaths to the state.  The Michigan Senate recently passed a substitute for House Bill 4031, which is focused on reducing the fine incurred by family farms for not reporting the death of a family member within eight hours.  Under current Michigan law, a family farm must report any fatality to the Michigan Occupational Safety and Health Administration within eight hours or face a fine of at least $5,000, which is exactly what happened to the Eisenmann family in 2019.  The Eisenmann family ran a family farm and was fined $12,000 after Keith Eisenmann fell to his death while repairing a barn roof.  The bill seeks to reduce the fine for families that are grieving the unexpected loss of a loved one.  Although a family farm will still be required to report the accidental work-related death of a loved one within eight hours, if a family fails to do so, the substitute bill drastically reduces the penalty.  The original bill passed Michigan’s House of Representatives late last year, but the substitute bill passed by the Michigan Senate clarifies the definition of family farm.  The substitute bill now goes back to the House of Representatives for approval.  

Bioengineered food standard now in effect.  January 1st marked the first day of compliance for the Bioengineered Food Disclosure Standard (the “Standard”).  The Standard requires food manufacturers, importers, and certain retailers to disclose to consumers that foods are or may be bioengineered.  The Standard defines bioengineered foods as “those that contain detectable genetic material that has been modified through certain lab techniques and cannot be created through conventional breeding or found in nature.”  The Agricultural Marketing Service has created a list of bioengineered foods to identify the crops or foods that are available in a bioengineered form.  For more information on the Bioengineered Food Disclosure Statement visit https://www.ams.usda.gov/rules-regulations/be.

A bite into the cheesier side of trademark law.  Last month, a federal court in Virginia decided on a dispute between European and American cheesemakers.  The dispute arose over whether the term “Gruyere” should only be used to identify cheeses produced in the Gruyère region of France and Switzerland or whether the term can be used generically to describe a type of cheese, regardless of where the cheese is produced.  The Plaintiffs, two European business groups, filed an application with the United States Patent Trademark Office (“USPTO”) to register “Gruyere” as a certification mark under 15 U.S.C. § 1127 which would only allow cheesemakers to use the term “Gruyere” if the cheese came from the Gruyère region.  The U.S. Dairy Export Council and others (“Defendants”) filed an opposition to Plaintiffs’ application with the Trademark Trials and Appeals Board (“TTAB”).  The TTAB found the term “Gruyere” to be generic term used to describe a type of cheese, not a cheese’s origin.  Plaintiffs’ then filed suit in a federal court in Virginia.  The federal court held that the “Gruyere” term had become a generic term to describe a type of cheese and failed to find the term worthy of trademark protection.  The court reasoned that although the term “Gruyere” may have once been understood to indicate where a cheese came from, over time “Gruyere” became a generic term to describe a type of cheese.  The court noted the term “Gruyere” has become generic overtime because: (1) U.S. regulations allow the use of the term “Gruyere” regardless of where the cheese is produced, (2) there is widespread sale and import of Gruyere cheese that is produced outside the Gruyère region, and (3) “Gruyere” is commonly used in dictionaries, media communications, and cheese industry events to describe a type of cheese without regards to where the cheese is produced.  Plaintiffs have since appealed to the Fourth Circuit Court of Appeals, which means we still have a gooey situation on our hands.  

USDA and Department of Justice announce commitment to protect farmers against unfair anticompetitive practices.  The U.S. Department of Agriculture (“USDA”) and the U.S. Department of Justice (“DOJ”) each announced their shared commitment to enforcing federal competition laws that are aimed at protecting farmers, ranchers, and other agricultural producers from unfair, anticompetitive practices.  In continuing their commitment to enforcing such laws, the agencies released a statement of principles and commitments which include: 

1. Farmers, ranchers, and other producers and growers deserve the benefits of free and fair competition.  The DOJ and USDA are therefore prioritizing matters impacting competition in agriculture. 
2. The agencies will develop an accessible, confidential process for agricultural producers to submit complaints about potential violations of the antitrust laws and the Packers and Stockyards Act.  
3. Increased cooperation between the agencies to enforce the laws that protect agricultural producers and to identify areas where Congress can help modernize rules and regulations.   

As we have seen over the past few months, the federal government is keen on preventing the consolidation of the agricultural industry in order promote fair and equal competition.  The announced commitments and principles demonstrate the government’s continued dedication to cracking down on unfair practices.