Business and Financial
Peggy Kirk Hall, Asst. Professor, OSU Extension Agricultural & Resource Law Program
The Ohio Senate concurred with the House of Representatives yesterday to enact changes to Ohio's Agricultural Commodity Handler's law, commonly known as the Grain Indemnity Fund. According to the bill sponsors, the changes will better protect Ohio farmers from grain elevator insolvency by raising the fund cap from $10 to $15 million and increasing the minimum fund balance trigger for the per bushel fee assessment from $8 to $10 million.
The Ohio Legislature originally created the Grain Indemnity Fund in 1983 to reimburse farmers when a grain handler becomes insolvent. The law requires licensing of all grain handlers, who pay a 1/2 cent per bushel fee on grain handled to maintain a minimum balance in the indemnity fund. In the case of a grain handler's financial failure, a farmer is reimbursed 100% for open storage grain in the elevator and 100% of the first $10,000 of a loss for future contracts, delayed price and basis transactions, with 80% reimbursement beyond the first $10,000 of loss. The legislature raised the indemnity fund's required minimum balance to $10 million in 2005.
Ohio Department of Agriculture handles the fund, which paid out $4.1 million to farmers in grain insolvency cases in 2011 and its highest payout of $2.5 million for one elevator in 2004. The fund currently is around $8.2 million, but bill sponsors believe that payouts similar to those of the past could nearly bankrupt the fund under today’s grain prices. Changes to the fund cap and the assessment trigger should prevent depletion of the fund, according to bill sponsor Senator Cliff Hite.
The legislation also changes grain lien priority rules, revises licensing requirements for commodity handlers and increases discretion for the ODA Director to determine the validity of claims. The following summarizes these and other provisions in the legislation:
- Increases the Grain Indemnity Fund's minimum balance from $8 to $10 million and its maximum balance from $10 to $15 million. ODA cannot assess the per bushel assessment on handlers outside of the minimum and maximum balances.
- Gives priority to the automatic lien established and held by ODA in the event of a commodity handler’s failure or insolvency. The lien will now have priority over all competing lien claims asserted against the commodity.
- Requires a commodity handler whose license is revoked to immediately notify all parties storing agricultural commodities in the handler's warehouse and all holders of receipts issued by the handler.
- Directs the ODA Director to determine the validity of claims against the fund with the recommendation of the Commodity Advisory Commission rather than the approval of the Commission.
- Revises the type of financial statements that must be submitted to the Director by an applicant for an agricultural commodity handler's license or renewal. The financial statements must consist of all financial statements and footnotes required by generally accepted accounting principles as promulgated by the Financial Accounting Standards Board together with an independent accountant's report on the statements.
- Establishes the total net worth requirements for a handler's license applicant as 15 cents per bushel handled in the previous year and raises the minimum net worth requirement to $50,000.
- Removes barley, oats, rye, grain sorghum, sunflower and speltz from the list of agricultural commodities addressed by the law.
Revisions to the law will be effective on October 11, 2013. View the agricultural commodity handler's legislation here.
Tags: ohio agricultural commodity handlers law, ohio grain indemnity fund
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Larry Gearhardt, Asst. Professor, OSU Extension
Much of Ohio’s forestland has been plagued by, first, the emerald ash borer, and more recently, the Asian longhorn beetle. Can you deduct the loss on your tax form when a major portion of your forest land is destroyed by these insects? You can if the timber or forest land is held to produce income. If the timber is held merely for personal use, the loss is not deductible. A tax deduction is available to owners who hold timber or forest land to produce income, as opposed to personal use.
Casualty Versus Non-Casualty Loss
Where to deduct a loss on your tax forms depends upon whether the loss is a casualty loss or a non-casualty loss. A “casualty” is defined as the damage, destruction, or loss of property from an identifiable event that is sudden, unexpected, and unusual. Disease, insect infestation, drought, or combinations of factors seldom qualify as a casualty because these types of damage tend to be gradual or progressive rather than sudden. However, Revenue Ruling 79-174 provides that a massive southern pine beetle infestation that killed residential shade trees in 5 to 10 days did qualify as a casualty. Whether or not it is a casualty depends upon the facts of the situation.
A “non-casualty” loss is defined as the damage, destruction beyond use, or loss of property from an identifiable event. Like a casualty, the precipitating event for a non-casualty loss must be unusual and unexpected, but unlike a casualty, it does not have to be sudden. For example, insect attacks have resulted in deductible non-casualty losses of timber according to Revenue Ruling 87-59.
Deduction of a Non-Casualty Loss
A non-casualty loss is a business deduction. With one exception, owners who hold their timber as an investment, as opposed to managing timber as a business, cannot deduct a non-casualty loss. The exception is unusual and unexpected drought.
To calculate the amount of a non-casualty loss, the owner must first calculate the basis of the timber lost as you would for a sale. You then divide the adjusted basis in the affected block of timber by the basis of the total volume of timber in the block, updated to immediately before the loss. The result is multiplied by the volume of timber lost.
As an example, assume that the fair market value of the timber lost was $9,000. The basis of the timber lost was $3,500. If you held the timber as part of a trade or business, you could deduct $3,500 allowable basis in the timber lost on IRS Form 4797. Start on IRS Form 4797, Part II, for timber held one year or less, or Part I for timber held more than one year. The loss will be netted with other gains and losses from the disposal of other business property. If you are holding the timber as an investment, you cannot deduct a non-casualty loss unless it was from drought.
In contrast with casualty losses, which are deducted first from ordinary income, non-casualty losses are first deducted from capital gains. This treatment of non-casualty loss is a disadvantage, since capital gains receive more favorable tax treatment.
Expenses
A loss frequently gives rise to related expenses, such as the cost of a cruise or appraisal to determine the extent of the loss, that cannot be included as part of the loss. Such expenses are often deductible, but where you take the deduction differs according to the type of loss.
If you hold your timber or forest land as part of a trade or business, these expenses are deducted on IRS Form 1040, Schedule C, or Schedule F if you qualify as a farmer. If you hold your timber or forest land as an investment, an owner can deduct expenses related to a non-casualty loss to the extent that they qualify as “ordinary and necessary” expenses, even if you cannot deduct the loss itself. However, an owner holding timber as an investment will report expenses on IRS Form 1040, Schedule A, in the “Miscellaneous deductions” section. This deduction will be subject to the 2% of adjusted gross income floor.
What If There Is a Gain?
If timber or forest land is damaged or destroyed and the owner receives payment in the form of a damage claim, salvage proceeds, insurance recovery, or other compensation, the transaction is called an involuntary conversion or involuntary exchange. If the payment that the owner receives is greater than the basis of the timber lost, there will be a gain rather than a deductible loss. Unless the owner elects to defer the gain by replacing the property within specified time limits, the gain must be reported.
For more information, see the USDA Forest Landowners' Guide to the Federal Income Tax here.
Tags: Casualty v. Non-Casualty Loss, Insect Infestation, Timber Tax
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Catharine Daniels, Attorney, OSUE Extension Agricultural & Resource Law Program
With the arrival of spring, many agricultural businesses may be looking to hire additional employees. Before putting those new employees to work, employers should take time to ensure a "legal" workforce. One important step is following the Form I-9 Employment Eligibility Verification process. And with the recent release of a new Form I-9, close attention to Form I-9 compliance is extremely important.
What is the purpose of Form I-9? The form aims to verify the identity and employment of every person hired to perform labor or services in return for wages or for anything of value that is given in exchange for labor or services, including food and lodging.
Why worry about Form I-9? Because correct completion of Form I-9 is both a legal mandate and a legal defense. Federal law requires every employer to complete an I-9 form upon hiring an employee. Filling out the form is not optional. Even if the employer knows the new employee, knows of the employee or knows the employee's family--the employer must do a Form I-9 for the employee. Once properly completed, a Form I-9 is the employer's defense against a potential claim of knowingly employing an unauthorized worker.
How does an employer complete Form I-9? Form I-9 compliance requires completion of three sections, as follows:
- Employers must have every newly hired employee complete Section 1 of the form no later than the first day of work for pay. Section 1 requests personal employee information such as name, address, e-mail, phone number, date of birth and social security number and requires the employee to attest to his or her citizenship status.
- No later than the third day of employment, the employer must complete and sign Section 2 of the form. Section 2 requires the employer to physically examine documentation presented by the employee showing identity and employment authorization. There are three lists of acceptable documents; employees may present one document from List A or a combination of one document from List B and one document from List C. Examples of documents include U.S. passports, driver's licenses, social security cards and employment authorization from the Department of Homeland Security.
- Section 3 applies to re-verification and rehires. An employer must complete Section 3 only if the employee is not a U.S. citizen or lawful permanent resident and his or her employment authorization documentation has expired. An employer may complete Section 3 for employees rehired within three years of the date that a Form I-9 was originally completed, or the employer may choose to complete a new Form I-9 for the rehired employee.
What does an employer do with completed I-9 forms? An employer must keep all completed I-9 forms for all current employees and make the forms available to federal officials in the event of an inspection. An employer must keep I-9 records for a certain period of time after employees stop working. This period of time varies; the government provides a chart to help employers identify the appropriate period of time.
Are there penalties for non-compliance? Yes. An employee may be subject to civil penalties for failing to properly complete, retain or make the I-9 forms available for inspection.
When is the new Form I-9 effective? On March 8, 2013, a new Form I-9 was released with revisions. The revised Form I-9 is now two pages long, includes expanded instructions, and has new fields for e-mail addresses, phone number, and foreign passport. Employers should be using this revised form now, but may continue to use the previous Form I-9 until May 7, 2013.
The importance of document inspection. To avoid liability, the employer should properly inspect the employee's documents. The documents must reasonably appear to be genuine and relate to the person presenting them. The employer's duty is to verify the documentation; the job of fully "investigating" whether the employee is authorized to work rests with U.S. Immigration Customs Enforcement. If an employee provides a document that does not appear to be genuine or relate to the employee and the employee cannot present other documentation, then the employer may terminate employment.
Avoiding discrimination liability. Employers should make sure they do not engage in any discriminatory practices when it comes to the Form I-9. At the pre-hire stage, an employer may not ask an applicant their citizenship, nationality, immigration status, type of work authorization, or green card status. After hiring the employee, an employer may not request a particular document for the employee to provide to complete the Form I-9; it is the employee’s decision as to what documents they will provide. An employer also may not request more documents than what are required by Form I-9. Such actions by the employer might result in a discrimination claim.
For complete information about I-9 compliance, check out the "Handbook for Employers - Guidance for Completing Form I-9" on the U.S Citizenship and Immigration Services I-9 Central website.
The Ohio legislature has approved a repeal of the Ohio estate tax, but the tax will remain in effect for another 18 months. The new law removes the Ohio estate tax obligation for any person who dies on or after January 1, 2013. Governor Kasich signed the provision into law on June 30, 2011 as part of the state's budget package. The final version of the repeal differed from the language proposed earlier this year in H.B. 3, which proposed ending the estate tax as of January 1, 2011 (see our earlier post).
Tags: Estate Planning, Ohio estate tax
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Thanks go to my colleague Robert Moore for submitting our first guest blog and sharing the following expertise on the issue of vomitoxin detection in corn.
by Robert Moore, Attorney, Wright Law Company, LPA
Ohio and other areas of the Corn Belt have seen unusually high levels of vomitoxin in corn. Vomitoxin is a mycotoxin that can cause livestock to reduce feed intake and reduce weight gain. Some elevators and ethanol plants have been rejecting corn that has tested too high for vomitoxin. What legal standing do producers with rejected corn have?
Producers with a Contract
Producers who have a contract with a buyer must look to the contract to determine their rights. All provisions, including any small print on the back of the contract, must be read entirely before assessing legal rights. The language of the contract is what matters; any verbal agreements made outside the contract have very little effect in enforcing legal rights. Even if the producer and buyer agree to certain terms, if the terms do not find their way onto the contract then the parties are probably not bound by the terms.
In regards to Vomitoxin, the key terms are those describing the quality of the corn required to be delivered. Grain contracts will include at least the bare minimum “No.2 Yellow Corn” requirement. No. 2 Yellow corn is a grade established by the USDA and may have up to 5% damaged kernels. The USDA defines damaged kernels as “kernels and pieces of corn kernels that are badly ground-damaged, badly weather-damaged, diseased, frost-damaged, germ-damaged, heat-damaged, insectbored, mold-damaged, sprout-damaged, or otherwise materially damaged.” Therefore, if the only grade standard in the contract is No. 2 Yellow Corn, a producer’s corn should not be rejected or discounted solely for Vomitoxin unless more than 5% of the kernels are diseased. However, corn could likely be rejected if 3% of the kernels were diseased with Vomitoxin and another 3% were damaged in another manner. The 5% threshold is the accumulation of all damaged kernels and not just a single type of damage.
Some contracts will include more restrictive grade terms such as “must be suitable to be fed to livestock” or “must meet all FDA guidelines”. The FDA has established a 5 part per million (ppm) threshold for hogs and 10 ppm threshold for cattle and poultry. Therefore, an elevator that requires corn to meet FDA standards or to be safe for livestock consumption can reject corn if it has more than 5 ppm vomitoxin. It is important to note that corn could have less than 5% damaged kernels but have more than 5 ppm vomitoxin. That is, the USDA No.2 Yellow Corn grade is a completely different standard that the FDA’s ppm standard. Ethanol plants must be extra concerned with vomitoxin becoming concentrated in the distillers grain by-product and may have even more restrictive terms than FDA.
Producers that have corn rejected can have the dual problem of having corn rejected and still being obligated to fulfill the contract. A worse case scenario would see a producer not being able to sell his corn due to high vomitoxin levels while still being required to fulfill his contract obligations for untainted corn with the elevator. Local reports indicate that elevators have been letting producers out of their contracts if their corn has been rejected for vomitoxin but this could change at any time.
Producers without Contracts
A producer who intends to sell a load of corn to the elevator without a contract has very little legal protection from the corn being rejected. The elevator is under no obligation to buy the corn and can simply opt not to buy the corn for any reasonable reason. Without a contract, the elevator is not bound to any predetermined grade standards. Even the smallest amount of vomitoxin in the corn could cause it to be rejected.
Disputed Grain Samples
Producers have the right to appeal the grain grading determination performed by the elevator. The Federal Grain Inspection Service (FGIS) oversees grain grading procedures and methods and also provides inspection and appeal services. A producer who disputes the elevator’s grading can send a sample to FGIS and FGIS’ determination will be binding on both parties. A FGIS office is located in Toledo. For more details and information on grading appeals, contact FGIS at 419- 893-3076.
Crop Insurance
Some crop insurance policies cover Vomitoxin damage. It is best to have the corn checked by an adjuster while still in the field to avoid tainted corn from being mixed with untainted corn in bins. Many producers have opted to not file a claim due to the significant impact on APH. They would rather maintain a higher APH than to file a marginal crop insurance claim. The deadline for any claims on vomitoxin was December 25, 2009. In the future, a producer’s crop insurance agent should be contacted at the first sign of Vomitoxin to ensure that all claim procedures are property followed.
Future Implications
Will we see grain contracts move away from the USDA No.2 Yellow Corn standard and towards the FDA ppm standard for vomitoxin and other mycotoxins? Elevators relying on the USDA standard could get stuck buying corn that exceeds the FDA’s ppm standards. Unless blended with non-tainted grain, this grain would seemingly be unmarketable as it could not be used for human consumption, livestock consumption, and/or export. Producers should anticipate possible changes to grading standards in contracts offered by elevators and other buyers. A careful reading of all new grain contracts should be a must for producers to make sure they fully understand the quality and grade of grain they are expected to deliver to the buyer.
Robert Moore is an attorney with Wright Law Co. LPA in Dublin, Ohio, www.wright-law.net. E-mail: rmoore@wright-law.net
Tags: grain contracts, grain grading disputes, grain rejections, vomitoxin
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The Ohio Supreme Court this week addressed a relevant issue given our current economic climate: when a debtor defaults on a written instrument, and neither the instrument or Ohio law authorizes the compounding of interest, can the creditor obtain compound interest for the amount due? The court's answer is no--unless there is an agreement between the parties that allows compounding of interest, or unless an Ohio statute specifically authorizes it. With neither supporting authority in the agreement or an authorizing statute, the creditor may only receive simple interest on the debt, said the court. The court's opinion in Mayer v. Medancic, Slip Opinion No. 2009-Ohio-6190 (Dec. 3, 2009) is available at http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2009/2009-Ohio-6190.pdf.
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