Land investment issues

Is Iowa’s anti-corporate farming rule strong enough to prevent Wall Street investment firms or institutional investors (such as pension or hedge funds) from acquiring Iowa farmland? What protection from such competition does Iowa law provide to family farmers, young and old, who are thinking about acquiring additional farmland in this era of rising farmland prices?

Iowa’s anti-corporate farming laws date back to 1975 when the Iowa Legislature adopted a moratorium on acquisition of “additional agricultural land” by corporations other than “family farm” corporations and “authorized” farm corporations. The law (Iowa Code Chapter 9H) has been amended several times over the years, but still offers protection for those individuals or entities who are “actively engaged in farming.”

Under this law, active engagement requires that the person or entity inspects the production activities periodically, furnishes at least half of the tools, performs physical work in the production of crops or livestock, and regularly makes management decisions.

Can they circumvent law?

Among other things, Iowa’s law states that an authorized farm corporation includes those with 25 or fewer shareholders who are natural persons, or persons acting in a fiduciary capacity for the benefit of the farming corporation or the shareholders.

To be a family farm corporation, the corporation must be founded for the purpose of farming and owning ag land, and those owning a majority of the voting stocks and a majority of the shareholders must be related. Furthermore, 60% or more of the gross revenues must come from farming. Thus, entities such as trusts, C and S corporations, and limited liability companies will be exempt from Iowa Code 9H if they fulfill the above obligations.

The penalty for violating Iowa’s anti-corporate farming rules is “injunctive relief,” meaning the Iowa courts may step in and prevent a non-qualifying corporation or individual from owning farmland in the state. Civil penalties may also apply for other violations. The attorney general’s office or county attorneys are tasked with initiating suits on behalf of the state.

You may ask: Does the state frequently have to step in to enforce these rules? So far, we haven’t seen many violations of Iowa Code 9H, but we will continue to monitor these issues. The Iowa attorney general did pursue a case against Smithfield in 2003 for issues associated with vertical integration in the hog industry under Iowa Code 9H. After much litigation, the case was settled in 2005.

If you have additional questions or concerns related to anti-corporate farming, you may be interested in reading the full statute. What we have covered here just scratches the surface of the law. Or give us a call at the center. Our website, www.calt.iastate.
edu
, has our contact information.

Another good question

Another question we received from a reader recently has to do with farmland acquisition and allocation of value to depreciable items. The reader asks, “I recently purchased a farm at auction. What items on the land are depreciable? I’ve heard some farmers have started to depreciate residual fertilizer supply. What questions do I need to be asking my tax preparer?

Upon the acquisition of a new farm, it is essential to allocate value to depreciable items. Land is not depreciable, but other items, such as fences, drainage tile, buildings, timber, wells, water lines and residual fertilizer supply are. Allocating value to depreciable items has become increasingly important with the rise in ag land values.

First, you need to determine the reasonable fair market value associated with the items and make the necessary allocations. Next, your tax preparer will want to establish the appropriate depreciation schedule. If you are looking to depreciate residual soil fertility that is present at the time of transfer, you’ll need to talk with a local agronomist who is experienced in grid sampling of soil.

As always, consult your tax preparer before you start the process. To avoid an IRS audit, you want to make sure the real estate contract identifies the purchase price allocation for these various items. In the event of the dreaded audit, make sure that you can justify the allocations. According to a recent article on this topic by ISU ag law professor Roger McEowen, “substantiation is the key.” Read his article at www.calt.iastate.edu/drainagetile.html.

Herbold is staff attorney for ISU’s Center for Agricultural Law and Taxation.

1099 rule gone

In April, Congress passed legislation wiping out the expanded 1099 reporting requirement for payments over $600 made to corporations (scheduled to begin in 2012). That was for any payment: farm equipment, feed, fertilizer, fuel, health care, etc. Congress also did away with the requirement for rental property expense payments over $600, a rule that began this year.

The provisions were unpopular in the ag community. For more, see Roger McEowen’s article at www.calt.iastate.
edu/form1099.html
.


This article published in the May, 2011 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2011.