Business and Financial
Governor Kasich has signed legislation to create a new “Ohio Farm Winery Liquor Permit.” While wine makers in Ohio may currently obtain a general liquor permit to make and sell wine on a farm, the general permit does not distinguish the source of the wine. The new Ohio Farm Winery Permit legally designates the wine as being made from grapes grown on the wine maker’s farm. Sponsors and supporters of the legislation claim that the special designation will help consumers know a wine’s localized nature, bring recognition to Ohio’s wine growing regions, keep Ohio competitive with other states that designate farm-produced wines, and ensure that farm wineries continue to receive property tax treatment as agricultural operations. Wineries that qualify for the new permit would "be able to present themselves as true farming operations," according to sponsor Ron Young (R-Leroy Township).
Ohio’s Division of Liquor Control may issue an Ohio Farm Winery Permit only to wine makers who meet two requirements: the manufacturer produces wine from grapes, fruit or other agricultural products grown on the manufacturer’s property, and the property qualifies as “land devoted exclusively to agricultural use” under Ohio’s Current Agricultural Use Valuation (CAUV) program, which requires that the land be used for commercial agricultural production and be at least 10 acres in size or, if less than 10 acres, generates a minimum average of $2500 in gross income.
Under the new law, an Ohio Farm Winery Permit holder may sell its wine products for consumption on the premises where manufactured, for consumption off the premises in sealed containers, or to a wholesale permit holder. An Ohio Farm Winery Permit holder may also manufacture, purchase and import brandy for fortifying wine and may import and purchase wine for blending purposes, but the total amount of wine used for blending cannot exceed 40% of all wine manufactured by the wine maker.
H.B. 342, which will be effective in late September, is available here.
Tags: farm winery, ohio farm winery liquor permit, hb 342
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By Larry R. Gearhardt, Assistant Professor and Field Specialist in Taxation, OSU Extension
Farmers have enjoyed an exemption from the Ohio and county sales tax for many years. Historically, obtaining the exemption from the sales tax was relatively simple. The farmer merely filled out a post card sized exemption form at his local agricultural retailer, checked the box that he was involved in “agriculture,” and most of his subsequent purchases from that agricultural retailer were exempt.
More recent, agricultural retailers seem increasingly reluctant to give farmers the agricultural exemption. Numerous questions have arisen regarding why sales tax is being charged on certain items of tangible personal property that the farmer feels should be exempt.
Much has already been written on the subject of the agricultural exemption from sales tax. For a good overview of the agricultural sales tax exemption, see OCES Bulletin 761, written by Paul L. Wright, Douglas E. Sassen, and Nan M. Still, (November 1987), and Fact Sheet OAM-2-12, written by Chris Bruynis, PhD (2012). Both of these documents remain good resources.
However, to fully understand why sales tax is now being charged on items that once appeared to be exempt, one must delve deeper into the Ohio law and its practical application to purchases. The Ohio Revised Code, the Ohio Administrative Code, legal cases that further interpret those codes, the Ohio Department of Taxation, and the sales tax collection process all have a bearing on the agricultural exemption from sales tax.
ALL SALES BEGIN AS TAXABLE
Initially, all sales are taxable. Ohio Revised Code section 5739.02 states: “. . . an excise tax is hereby levied on each retail sale made in this state.” ORC sec. 5739.02(C) expands this requirement by stating: “(C) For the purpose of the proper administration of this chapter, and to prevent the evasion of the tax, it is presumed that all sales made in this state are subject to the tax until the contrary is established.” The effect of this statement is to place the burden of proving that a sale is exempt on the purchaser. As a general legal principle, exemptions from tax are narrowly construed.
HOW DO SALES BECOME NON-TAXABLE?
There are two ways that sales become non-taxable. One way is for a sale to be “excepted” from the definition of a sale by statute. The other way is for a sale to be “exempted” from the sales tax requirement.
A sale is non-taxable if it is specifically excepted from the definition of a “sale.” Ohio Revised Code section 5739.01(B) provides the definition of “sale” and the act of “selling.” One can find an extensive list of transactions that are considered to be a “sale” or the act of “selling” in this section. Also contained in this list are specific exceptions for transactions that are not considered to be sales or the act of selling within the legal definition.However, more important for our discussion, the agricultural sales tax exemption is an “exemption” from sales tax, not an “exception.” Therefore, this paper focuses on Ohio Revised Code section 5739.02 which provides a list of goods and services that are specifically exempted from the Ohio sales tax.
AGRICULTURAL SALES TAX EXEMPTIONS IN THE OHIO REVISED CODE
ORC section 5739.02(B) provides a list of 53 items that are specifically exempted from the Ohio sales tax. Several items apply to agriculture:
(B)(13) building and construction materials sold to construction contractors for incorporation into a horticulture structure or livestock structure for a person engaged in the business of horticulture or producing livestock. This exemption was later expanded by section (B)(36) to include sales to “persons” in addition to contractors.
(B)(30) land tile
(B)(31) portable grain bins
The subsection that applies most often to agriculture is (B)(17). This subsection states:
(B)(17) Sales to persons engaged in farming, agriculture, horticulture, or floriculture, of tangible personal property for use or consumption primarily in the production by farming, agriculture, horticulture, or floriculture of other tangible personal property for use or consumption for sale by farming, agriculture, horticulture, or floriculture; or material and parts for incorporation into any such tangible personal property for use or consumption in production; and of tangible personal property for such use or consumption in the conditioning or holding of products produced by and for such use, consumption, or sale by persons engaged in farming, agriculture, horticulture, or floriculture, except where such property is incorporated into real property.
In an attempt to better understand this subsection, let’s break it down into its requirements.
- The sale must be made to a person engaged in farming, agriculture, horticulture, or floriculture;
- It must be an item of tangible personal property;
- The item of tangible personal property must be used or consumed primarily (more than 50%) in the production of another item of tangible personal property that will eventually be sold;
- The item can be material or parts incorporated into tangible personal property for use or consumption in farming;
- The item can be for use or consumption in the conditioning or holding of products produced by a person involved in farming, agriculture, horticulture, or floriculture, for further use, consumption, or sale, EXCEPT where such item is incorporated into real property.
THE OHIO ADMINISTRATIVE CODE PROVIDES FURTHER CLARIFICATION
The Ohio Revised Code contains the laws passed by the Ohio General Assembly. In contrast, the Ohio Administrative Code contains the rules that agencies use to implement those laws. The rules in the Ohio Administrative Code are promulgated by the agency that is responsible to administer the program and those rules are then reviewed and approved by another agency called the Joint Committee on Agency Rule Review.
Ohio Administrative Code (OAC) rules have a more direct impact on the agricultural sales tax exemption because they are promulgated by the Ohio Department of Taxation and serve as the guidelines for collecting the sales tax.
OAC section 5703-9-23 expands the agricultural sales tax exemption provided in the Ohio Revised Code. This section first provides the definitions for “farming”, “agriculture”, “horticulture”, and “floriculture.” “Farming” is defined as the occupation of tilling the soil for the production of crops as a business and shall include the raising of farm livestock, bees, or poultry, where the purpose is to sell such livestock, bees, or poultry, or the products thereof as a business. “Agriculture” is defined as the cultivation of the soil for the purpose of producing vegetables and fruits and includes gardening and horticulture, together with the feeding and raising of cattle or stock for sale as a business.
Note that the definitions of “farming” and “agriculture” include tilling the soil and cultivation of the soil. Therefore, taking all of the requirements together, the agricultural sales tax exemption has been allowed only for those items that are used directly and primarily in the tilling or cultivation of the soil, used in the propagation of plants, or the care and raising of livestock. Timber is not included, nor is a utility vehicle or a chain saw if the technical definition is strictly followed.
OAC section 5703-9-23 further expands what “sales” are tax-exempt. Most of those sales are items that are incorporated into, or used or consumed, producing other tangible personal property for sale.
OAC section 5703-9-23 concludes with three very important statements:
- Exemptions do not apply to any article which is incorporated into real property
- The tax or non-tax of a sale is determined by the use of the item sold. An article of tangible personal property that appears to be agricultural in nature must also be used for a non-taxable purpose. For example, a pitch fork used in my barn may be tax-exempt, but taxable if primarily used in my garden.
- Sales of materials such as lumber, nails, glass and similar items to be used in the construction or repair of buildings shall be subject to the tax.
CASE LAW PROVIDES THE FINAL DETERMINATION
Even with the foregoing analysis of the laws and rules, it is impossible to list every item of tangible personal property that is exempt from sales tax. Certain items are clearly used in agriculture and are exempt. On the other hand, some items are clearly not exempt. Some items fall somewhere in the middle and are difficult to tell whether they are tax-exempt, either because the item is used for a personal use a majority of the time or the items could be used for a taxable purpose.
Occasionally, courts are asked to determine the taxability of a particular item. This is most often seen where the resulting sales tax is large enough to warrant spending the money to go to court, such as a manufacturer that is going to produce or purchase mass quantities of that item. Individuals rarely can warrant going to court over a sales tax dispute.
THE PRACTICAL ASPECTS OF THE AGRICULTURAL SALES TAX EXEMPTION
Armed with the best legal information, a farmer may firmly believe that the item he is purchasing should be tax-exempt. However, the cash register rings up that the sale as taxable. Does he have to pay the sales tax? Yes, from a practical standpoint. There are two ways to look at each situation – the legal way and the practical way. From a practical point of view, the farmer may still have to pay the sales tax at the cash register even though he feels that the item is tax-exempt. However, if the farmer is erroneously required to pay the sales tax, he/she must file an application for a refund (ST-AR form) with the Ohio Department of Taxation.
Let’s take a closer look at the collection process. Both ORC section 5739.02(C) and OAC section 5703-9-03 state that all sales are presumed to be taxable until the contrary is established. Each vendor is required to collect from the consumer, as a trustee of the State, the full and exact amount of the tax payable on each taxable sale. To be tax-exempt, the farmer must provide to the vendor a fully completed exemption certificate. The vendor is required to keep this exemption certificate on file.
In discussions with some local retailers, I discovered that one large agricultural retailer receives a list of taxable and non-taxable items from its corporate office and the local store is required to collect the sales tax according to the list, notwithstanding the identity of the purchaser. Conversely, the local tractor store determines in-house which items are taxable or non-taxable and for items that may go either way, the store gives the exemption if the purchaser has a tax-exempt form on file. For other large retailers without an agricultural base, they do not recognize the agricultural sales tax exemption.
Exemption forms are available on the Ohio Department of Taxation’s website and may be reproduced. The farmer should use form STEC-U for a unit exemption or STEC-B for a blanket exemption if he is going to purchase numerous items from that vendor. If the farmer wants a refund of sales tax that he feels is erroneously paid, he should file form STAR with the Ohio Department of Taxation. Rather than receiving a cash refund of the sales tax erroneously paid, the farmer may apply the refund to any indebtedness that he owes the State, for example, income tax.EXEMPTION CERTIFICATES
As previously mentioned, exemption forms may be obtained from the Ohio Department of Taxation website. OAC section 5703-9-03(D) states that: “An exemption certificate is fully completed if it contains the following data elements:
- The purchaser’s name and business address,
- A tax identification (e.g. vendor’s license or consumer’s use tax account) for the purchaser issued by this state, if any,
- The purchaser’s type of business or organization,
- The reason for the claimed exemption, and
- If the certificate is in hard copy, the signature of the purchaser.
If any of these elements is missing the exemption certificate is invalid.”
There has been some confusion recently caused by some agriculture retailers advising farmers that if they want the sales tax exemption, the farmer needs to go to the county courthouse and obtain a vendor’s license. This is not correct. The retailer is trying to comply with the requirement found in subsection (D)(2) above where it states that the exemption certificate requires a tax identification number. However, the retailer’s advice ignores the last two words of that section – “if any.” Farmers are not required to obtain a vendor’s license because they do not sell at retail. I recommend that the farmer write “none required” or “not applicable” on the exemption form where it requests a tax identification number. Of course, then the farmer is burdened with explaining to the cash register attendee that a vendor’s license number is not required. Good luck with that.
ULTIMATE LIABILITY FOR SALES TAX
Many farmers believe that if they give a tax exemption form to the retailer, the farmer should not be ultimately responsible for the sales tax. However, both the purchaser and the vendor may ultimately be liable for the tax. Initially, the purchaser is responsible to pay the sales tax to the vendor. If the purchaser claims that the sale is non-taxable, he/she must provide an exemption certificate to the vendor specifying the reason that the sale is non-taxable (ORC 5739.03(A)).
A vendor that obtains a fully completed exemption certificate from a purchaser is initially relieved of liability for collecting and remitting tax on any sale covered by that certificate. If it is later determined that the exemption was improperly claimed, ORC section 5739.03(B)(1)(b) makes the purchaser liable for any tax due on that sale.If a vendor improperly fails to collect the sales tax, another section of the ORC makes either the purchaser OR the vendor personally liable for the sales tax. ORC section 5739.13 says that the tax commissioner may make an assessment against either the vendor or the purchaser as the facts require. An assessment against a vendor when the tax has not been collected shall not discharge the purchaser’s liability to reimburse the vendor for the tax. From a practical standpoint, the vendor would have to take steps to collect the unpaid tax from the purchaser.
To put additional pressure on a vendor to collect and remit the sales tax, ORC section 5739.33 states that if any vendor required to file (sales tax) returns for any reason fails to file the return or remit payment, any employee having control or supervision over the filing of returns and making payments, or any officer, member, manager, or trustee who is responsible for the vendor’s fiscal responsibilities shall be personally responsible. The amount due may be assessed against that person.
Because of this liability exposure, from both a corporate and personal standpoint, it is my opinion that the vendor is going to err on the side of collecting the sales tax if it is not clear that the item is non-taxable.
CONCLUSION
Even though it may appear from a legal standpoint that the purchase of an item should be tax-exempt, without a complete list of what items are taxable and non-taxable from the Ohio Department of Taxation, there is still room for confusion. The vendor initially determines whether the item is non-taxable at the cash register. The purchaser needs to provide a tax-exemption certificate to the vendor to receive the sales tax exemption. If the vendor collects sales tax on an item that the farmer feels is tax-exempt, the farmer should file a request for a refund with the Ohio Department of Taxation.
Ohio State University Extension will offer four Farmland Leasing Workshops throughout Ohio this February.
The three hour workshops will include topics of interest to both landowners and farm operators, such as factors affecting leasing options and rental rates, analyzing rent survey data and legal requirements and provisions for farm leases. The speakers will help attendees consider how to use data in negotiations and to apply legal information to leasing practices.
Workshop presenters include Barry Ward, Assistant Professor, OSU Extension and Leader, Production Business Management and Peggy Hall, Assistant Professor, OSU Extension and Director of OSU's Agricultural & Resource Law Program.
Topics included in the workshop are:
- Factors affecting leasing options and rates
- Evaluating cash rent survey data
- Farmland leasing options: fixed and flexible cash leases
- Creating a legally enforceable lease
- Legal provisions in farmland leases
- Analyzing good and bad leasing practices
Dates and Locations of Farmland Leasing Workshops:
February 4, 2015, 9:00 am—12:00 pm
Fairfield County Ag Center, Lancaster
Registration: Call OSU Extension at 740-653-5419. A program on the Farm Bill will follow the Farmland Leasing Workshop. $10 registration fee for both programs.
February 6, 2015, 1:00–4:00 pm
Kent State University Tuscarawas, New Philadelphia
Registration: Call OSU Extension at 330-339-2337. $15 registration fee.
February 11, 6:00–9:00 pm
Paulding County Extension Office, Paulding
Registration: Call OSU Extension at 419-399-8225. $20 registration fee if registered by February 4.
February 20, 9:00 am—12:00 pm
Greene County Career Center, Xenia
Registration: Call OSU Extension at 937-372-9972, x114. Call by February 16 for free registration.
Check the events calendar at https://farmoffice.osu.edu for workshop details.
Attorney Bill Bridgforth will present OSU's next webinar on "The 2014 Farm Bill: Guiding a Client through the New Law" on Friday, January 9 at 1 pm EST. Bridgforth is a senior partner in the Arkansas law firm of Ramsay, Bridgforth, Robinson & Raley, LLP who represents agricultural producers around the United States. He will explain the election decisions producers and landowners must make under the new Farm Bill and will provide examples of decision making impacts.
There is no registration or fee required for the webinar, which is accessible at https://carmenconnect.osu.edu. A recording of the webinar and a listing of additional webinars is available at farmoffice.osu.edu.
The Ohio Food, Agriculture & Environmental Law Webinar Series is an outreach project of OSU Extension's Agricultural & Resource Law Program.
Tags: farm bill, legal education
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Tax preparers and farmers who file their own farm tax returns have an opportunity to participate in OSU Extension's Agriculture and Natural Resource Tax Issues Workshop on December 19, 2013. The day long webinar-based workshop features Professor Phil Harris of the University of Wisconsin, a leading expert in farm and natural resource tax law. Harris will address issues specific to farm tax returns and will be available for a live question and answer session during the workshop. Attendees can view the webinar from home or office or at one of nine facilitated host locations around the state, and can receive continuing education credit for the workshop. Visit this site for more information.
OSU Extension's Larry Gearhardt, field specialist in taxation, organizes the workshop in concert with the OSU Income Tax Schools, a multi-day continuing education program for those who prepare federal tax returns. More information and the tax school schedule for this fall are available at http://go.osu.edu/taxschools.
Tags: farm tax law, farm tax returns, natural resource tax law
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Peggy Hall, Asst. Professor, OSUE Agricultural & Resource Law Program
The Ohio legislature has already addressed a legal issue that recently created discord on Ohio's Sixth District Court of Appeals. In its recent decision in Ohio Department of Agriculture v. Central Erie Supply & Elevator Association, the appeals court disagreed over how to interpret the statutory lien provisions in Ohio's Agricultural Commodity Handler's Law. The majority held that the statutory lien favors farmer claimants over all other interests while the dissent argued that the statute is "entirely silent" on the issue of priorities between farmers and competing parties who have security interests in the proceeds of a failed grain handler. Obviously attuned to the problem, the Ohio legislature revised the law just over a month ago to include language that removes any doubt on the matter.
Ohio's Agricultural Commodity Handler's law contains many provisions designed to protect farmers from the risks of doing business with a grain elevator or other grain handler. If a handler suffers financial distress before paying farmers who've deposited grain with the handler, the law establishes an automatic statutory lien on behalf of the farmers. The law grants the Director of the Ohio Department of Agriculture power to enforce the statutory lien against the grain handler and distribute lien proceeds among the unpaid farmers. The law also states that the commodity handler's law takes precedence over any conflicting provisions for secured transactions in another section of Ohio law, Ohio Revised Code section 1309.
In the Central Erie Supply case, the question before the court was whether the statutory lien for the farmers had priority over a $425,691 security interest established by Citizens Banking Company, a creditor of the failed grain handler. The panel of judges examined the commodity handler's law and reached opposite conclusions. The majority concluded that the law conflicted with R.C. section 1309 and thus took precedence over the bank's security interest that was established under section 1309. The dissent argued that the language about conflicts between the different laws referred only to the issue of how to distribute proceeds between farmers and did not pertain to other security interests established under R.C. section 1309. Both sides did agree, however, that the issue of priority between farmers and other security interests is a matter for the legislature, not the courts. "Yet, unless and until the legislature acts, we are bound to interpret the law as it is currently written, not as we wish it to be," stated dissenting Judge Yarbrough.
The Ohio legislature did act on the matter--and did so before the court had even issued its ruling. In late June of this year, the legislature approved S.B. 66 (see our earlier post) and added this language to the commodity handler's law: “The lien established under this section shall have priority over all competing lien claims asserted against the agricultural commodity assets.” The legislation ascertains that upon its effective date of October 11, 2013, a statutory lien established under the commodity handler's law will be first in line ahead of all other liens claimed against the assets of a failed grain handler. Until October 11, the Central Erie Supply decision bolsters an argument seeking the same order of priority stated in the new law. Based on the recent actions of the legislature and the court of appeals, the commodity handler's statutory lien now has a few more teeth.
Read the Central Erie Supply decision here, S.B. 66 here and the Agricultural Commodity Handler's Law here.
Erin Porta, OSUE Agricultural and Resource Law Extern and Peggy Hall, Asst. Professor, OSUE Agricultural and Resource Law Program
Like much of the business world, many Ohio farmers are choosing to operate as Limited Liability Companies (LLCs) to gain personal liability protection for LLC members and ample estate, tax, management and business succession advantages.
Under Ohio’s LLC statute (ORC § 1705), an LLC is treated as a separate legal entity apart from its owners. Thus, the general rule places the debts, obligations, and liabilities of an LLC, whether arising in contract, tort, or otherwise, solely on the shoulders of the LLC—not its members or managers. LLC members and managers stand to lose only the money they've invested in the LLC, not their own house, car or other personal possessions.
Increasingly, those who deal with LLCs are finding ways around this personal liability “shield.” One strategy that is becoming more frequent among lenders, landlords and other businesses doing business with LLCs is to require a personal guaranty from individual LLC members or managers. The personal guaranty binds the LLC members or managers to a promise to be personally liable for the debts and liabilities of the LLC.
While personal guaranties are becoming a ubiquitous part of doing business, their legal implications are far from routine. When faced with a demand for a personal guaranty, here are several important points LLC members or managers should keep in mind:
- A valid personal guaranty will negate the personal liability protection provided by the LLC. By signing a personal guaranty you are essentially waiving your LLC personal limited liability shield. For example, if the LLC cannot repay the loan you guaranteed, the creditor may come after your personal assets. However, the personal guaranty will not negate other LLC liability protections, such as liability for torts committed by the business.
- The word “guaranty” is not necessary to create a personal guaranty. There are no formal magic words required for the formation of a personal guaranty; it is sufficient if the document contains words that unequivocally create a promise to answer for the debt of another.[i] Examples of language that create a personal guaranty include: a party "guarantees" an obligation of another; a party agrees to immediately undertake the obligations of borrowers upon written notice of default from the creditor; a creditor has the right to "call" upon the LLC manager to make payments due from the LLC; or the LLC manager agrees to be "responsible for" an obligation when due.[ii]
- How you sign may matter. Ohio cases indicate that signing your name followed by your business title (“John Doe, President”) on an agreement that contains personal guaranty language does not negate personal liability or shift liability to the LLC. [iii] However, disclosing that you are representing the LLC by using “by,” “per,” “on behalf of” and indicating the name of the business may deem the agreement ambiguous and prevent personal liability. [iv] There is a major hurdle to this strategy, however: the other party must accept this form of signature—a tall order considering it would essentially render the personal guaranty agreement meaningless.
- You will almost always be responsible for the entire debt. The personal guaranty agreement will specify your obligations; however, most create unconditional joint and several liability for all who sign the agreement. In other words, each LLC member or manager who signs is responsible for the full amount of the debt and the bank may pursue any and all LLC members or managers who signed the guaranty.
- Some personal guaranties live beyond the original transaction. A guaranty may be restricted to a single transaction or may continue to apply to some or all future transactions. Phrases such as "now or at any time hereafter," "all obligations however and whenever incurred," and "now existing or hereafter contracted" are examples of language that may create a personal guaranty for future transactions of the LLC. Under Ohio law, a guaranty will likely not be interpreted as one that continues into the future absent this type of language, which displays a clear intent to be bound in the future.[v] Where the guaranty is a continuing guaranty, it remains effective until the LLC manager or member clearly communicates an intent to revoke and no longer be bound by the guaranty.[vi]
- Some lenders or property owners are willing to negotiate. While personal guaranties are becoming very common, they can be negotiable and tailored to your company's situation. Some businesses automatically include personal guaranty agreements or language in their standard business transactions and it's possible that a deal could go through without the guaranty .[vii] For example, an LLC that can show adequate capital in its reserves may be able to negotiate a loan without a personal guaranty. Alternatives to a personal guaranty, such as larger security deposits or letters of credit, may also be negotiated. If the person or business insists on having a personal guaranty, there are still ways to limit personal risk such as proposing an endpoint to the guaranty when certain conditions are met (dollar amount caps, no default for a set period of time); subjecting only certain personal assets to the guaranty; ensuring the guaranty is limited to the particular transaction at hand and not future transactions and exempting a spouse of an LLC manager or member from the guaranty.
- Ignorance is not bliss. Claims that a party thought he or she was signing something other than a personal guaranty, did not read the entire document, or was not made aware of the personal guaranty have generally not been well received by Ohio’s courts as reasons to negate a personal guaranty.[viii] To void a personal guaranty on the basis of "ignorance," there must be evidence demonstrating that a party committed fraud in securing a personal guaranty from another party—a hard standard to meet.
- Personal guaranties are not the only way to waive LLC personal liability protection. Be aware that co-signing a loan, signing a contract in your own name, pledging personal property as collateral, acting without authority, or making fraudulent representations or omissions when applying for the loan may also place your personal assets at risk.
Nearly any sort of business deal can involve a personal guaranty. The following recent Ohio court case [ix] demonstrates how a simple personal guaranty can have lasting consequences:
- The owner of an Ohio building company submitted a credit application to a supplier in order to purchase materials on credit. As part of the credit application, the owner signed a personal guaranty for the company's transactions. The guaranty included language stating that it was “a continuing guaranty for all sales heretofore and hereafter made” between the two companies until “the time that notice of the termination of this guaranty shall be received, in writing, by personal mail at the principal office of (the supplier).”
- Upon approval of the credit application, the owner of the building company purchased materials on credit and promptly paid the supplier in full. The owner of the building company then continued to purchase materials from the supplier on credit for over a decade and the building company paid the amounts due. However, thirteen years after the personal guaranty and original purchase was made, the building company was unable to pay for its purchases.
- The supplier alleged that the owner of the building company was personally liable by way of the thirteen year old personal guaranty, which the building company owner had failed to terminate or revoke in writing.
- The court enforced the personal guaranty, despite the building company owner’s belief that he guaranteed payment only for the original purchase of materials. In holding the building company owner personally liable for the company's debt, he court pointed to the language in the original guaranty which used the word “continuing,” and noted that the guaranty did not have language limiting its duration or application to any specific purchase.
This case is a good reminder that failing to understand or negotiate personal guaranty language can lead to serious and unintended results for the managers or members of LLCs. * * * For information on organizing an LLC, see Robert Moore & Barry Ward, OSU Extension, Fact Sheet: Starting, Organizing, and Managing an LLC for a Farm Business, available at http://ohioline.osu.edu/bst-fact/pdf/LLC_Farm_Business.pdf.
Tags: LLC personal guaranty, LLC personal liability protection, personal guaranty
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Catharine Daniels, Attorney, OSU Extension Agricultural and Resource Law Program
Attorneys across Ohio recently came together for the 2013 Ohio Agricultural Law Symposium to learn about current legal issues for Ohio farmers and agribusinesses. In a session about protecting the farm and agribusiness, Cari Rincker, a food and agricultural law attorney in New York City, discussed why farm and agribusinesses might consider using a Non-Disclosure Agreement (NDA) to safeguard confidential business information.
An NDA is not typically a tool that a farm or agribusiness would think of using in a business transaction. According to Rincker, however, NDAs are underutilized in the food and agriculture industry. Many farms and agribusinesses develop their own ideas, concepts, know-how, trade secrets, intellectual property, business plans or financial information. Preventing other parties from disclosing these types of information can be important to the long-term health and viability of the farm or agribusiness.
Rincker highlighted two common situations for using an NDA. One is when a farm or agribusiness is entering into business discussions with another party; confidential information could be disclosed during the course of these discussions. For example, if a farmer approached a website developer about his or her proposed online agribusiness, that farmer may wish to have an NDA with the website developer to keep the business plan confidential. The second situation concerns employees or independent contractors. An NDA binds employees and contractors to confidentiality about private information they acquire from working for the business. An agribusiness may want a bookkeeper to maintain confidentiality about business finances, for example.
What's in a Non-Disclosure Agreement? According to Rincker, an NDA should address at least these questions:
- Who will be exchanging confidential information?
- What is the purpose of the exchange of confidential information?
- What type of information will be considered “confidential” for purposes of protection under the NDA?
- How can the confidential information be used and who can use it?
- How will the secrecy of the confidential information be maintained?
- How long will the confidentiality of the information be maintained?
- What are the consequences of a breach or misuse of the confidential information?
Maintenance of confidential information should not be taken lightly, states Rincker. If your farm or agribusiness could be harmed by the disclosure of private information, talk with your attorney about an NDA. For more information on NDAs, visit the Rincker Law website and blog at http://rinckerlaw.com/blog/.
Tags: Cari Rincker, Non-Disclosure Agreement, Ohio Agricultural Law Symposium
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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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