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									                              Class #35
 Farm Tenancy II
 Final Exam. – Dec. 15 ?
 Farmer’s Tax Guide (See rules and example at the back.)
 Federal Tax Form packet. Note IRS forms are at:
 www.irs.ustreas.gov/prod/forms_pubs/forms.html
   Case          Action, Issue&Facts           Holding& Rule
   Bert          -- Aaron Patten              Andy Peter
   Olson        -- Holly Smith               Melissa Spaid
   Borders       -- Adam Veld                Courtney Cooprider
   Dwyer       -- Ashley Dean-Cross          Bart Evans
   Finley      -- Jeremiah Faulk             Jonathan Franks
                         Quiz 11
 1. Indiana’s farm product
  lien rules include a “direct    3. At common law, the
  notice system.”                  tenant owns a crop until
 A. True B. False                 harvested under a share
 C. False, “direct notice” is     lease.
  a “federal option.”             4. “Chapter 12” allowed
 D. True, and “direct             farmers in bankruptcy to
  notice” is a “federal            escape all “secured”
  option.”                         portions of land debt.
                                  5. Indiana has a “four
 2. An oral lease for             month” rule for lease
  Indiana farming may be
                                   termination notices.
  enforced in court.
   General Rights and Duties of Landlord
                and Tenant

 Only a reasonable use of the land for the purposes
  for which it is obtained is permissible.
 No waste.
 Farming in a husband-like manner.
 Proper tillage so as not to exhaust the soil.
 Repairs should be made, i.e., maintain the property
  the way you found it ordinary wear and tear
                     Bert vs. Rhodes
                 St. Louis Ct. of App. „24
 Aaron Patten – Action?
 Damages for trespass by the landlord!
 Issue?
  May Rhodes the landowner enter to sow… ?
 Facts: Rhodes leased to Bert for a five year term.
 -- Bert, the tenant, filed suit after the landlord entered &
  sowed clover on 30 ac. of wheat & oats.
 -- Rhodes charges Bert’s plowing out of 7 acres of alfalfa
  without the landowner’s consent.
 Trial court held for the landowner, based on the local custom
  of sowing clover in small grain to preserve the fertility of the

 Andy Peter
 Holding: No, the landowner cannot come in during a
  lease and take over.
 -- Unless the lease specifies otherwise, the tenant
 has total control over the land.
 --- Tenants can do what he or she wants with it, within
 The tenant was showing no harm done to the land and
  was in control of his operation.

 Holding-- -- Rhodes felt Bert violated the lease by
  plowing up an alfalfa field.
 however the lease gave to tenant control to do what he
  wants with the land and all tillable acres.
Rule: If a landlord wants to manage (what to grow
  where, and tillage practice) the farm via the lease he
  or she can do that, but it in writing!
Note: “Farm program” rules impose conservation plans to
  benefit from certain govn’t payments!
               Olson v. Bedke
                 S. Ct. of Idaho, „76

 Holly Smith – Action?
 Termination of a lease
 Facts: Frank and Glen Olson leased to Herman &
  Ruby Bedke, who had allegedly failed to comply
  with the material terms of the lease.
 -- Olson's complaint charged poor farming practices
  by the Bedke's
 -- failed to irrigate, allowed erosion, and poor weed

 Melissa Spaid – Holding?
 Thompson on Real Property -- on farm lands, the
  tenant is liable for waste for affirmative or
  negligent acts which constitute poor husbandry.
 Also, see Eliason v. Eliason, and Anderson v.
  Hammon failure of the lessee of farm land to
  follow good farm practices.

 Remanded to trial court on these and other grounds
 Idaho's statutory provisions, gives the Olson's the
  right to revoke their contract with the Bedke's in
  case of waste, and "poor husbandry".
      Liability for Injuries on the
 Generally, the landlord is not liable to the tenant or
  to third parties for their injuries on the premises
 -- because the tenant has sole possession and
  control of the premises.
 -- One exception is when the tenant or a 3rd party is
  injured while lawfully on the premises due to a
  concealed or hidden defect or hazard.
    If the landlord knew of the hazard, landlord is
        Liability for Injuries on the
 If the tenant knows or should know of defects, he is
  likely to be held liable for having failed to correct
  the condition.
 Landlord is not likely to be liable for acts of the
  tenant since nothing the tenant does can be referred
  to the landlord.
 When both tenant and landlord know of a defect in
  the premises leading to a third party injury, they
  may be jointly liable.
               Crop Ownership

 A crop belongs to the tenant until it is
  harvested and divided – by common law.
 Tenants exclusive right in the crop tends to
  be true even in a share lease, unless other
  provisions are agreed to or there is a statute
  that governs.
 Since the crop belongs to the tenant, legal
  rights for damage to the crop are in the
  tenant--even though there is a share rent.
         Borders V. Roseberry
               S. Ct. of Kansas „75

 Adam Veld – Action?
 Damages from the landlord for “pre-existing
  condition at a rental house.”
 Issue: Is the landlord liable for the accident that
  resulted from this condition that existed when
  tenant moved in
 Facts- The defendant, Roseberry owns a single
  family residence, and leased it to Rienecker.
 The landlord repaired the house, including the
  guttering, which had not been put back on yet!!

 Rain off the roof accumulated on the front steps of
  the house, and freezing made a hazardous situation!
 The landlord as well as the tenant new of this
 On Jan. 9, 1971, there were ice conditions and the
  landlord had broken the ice off of the steps with a
 Borders, the plaintiff, arrived at the house as an
  invited guest of the tenant--a social guest
 The guest fell on the icy steps, and was injured.
 Courtney Cooprider – Holding?
 - The Judgment for the defendant.
 The decision was based on the fact that the
  landlord was not responsible for the tenant’s
  social guest.
 -- Generally, tenant is responsible for the
  conditions of the premises, for pre-existing
  conditions, except:

 Exceptions:
 1. Undisclosed dangerous conditions known to
      landlord, but unknown to the tenant.
 2. Structural conditions dangerous to persons
  outside of the premises? For example ??
 3. Premises leased for admission of the public.

 4. Parts of land retained by landlord which
      the lessee is entitled to use.
 5. Where lessor contracts to repair.
 6. Negligence by lessor in making repairs.
 In this case, 1- 5 don’t apply.
 Perhaps #6 merits consideration.

 Holding -
 But #6 applies only when the tenant lacks
  knowledge of the situation--ice on the sidewalk.
 Tenant had full knowledge!
 Thus, landlord is not “guilty of negligent
 Rule?Generally, tenant is liable for premises …
           Other Rights & Duties

 Sale of the land: -- generally, without other
  stipulations, the tenant has the same rights, &
  lease, with a buyer as with the landlord/seller.
 -- the existence of a written lease may be an
  issue in some states, but not in Indiana.
            Other Rights & Duties
 Sale of the Land:
 -- a tenant is entitled to a “proper notice” or his
 -- to have “full protection,” record the lease or an
  affidavit about the lease.
 Assign or Sublet:
 -- To assign or sublet may be forbidden by statute,
  (not so in Indiana) but it is best to cover it in a
  written lease.
 -- However, if there is an assignment or sublease,
  the new tenant has the same rights and terms ...
    Dwyer v. Cooksville Grain Co.
              App. Ct. of Ill, 4th Dist. „83

 Ashley Dean-Cross -- Action?
 Issue? Does the landlord’s crop lien win out over the
  Bank’s security interest?
 Facts: -- Dwyer leased 300 acres to Morefield for
 -- Then Morefield borrowed $24,000 from McLean
   County Bank
 -- Bank took a security interest in crops to be grown on the 300
  acres and perfected by filing.
 -- Morefield sold the crop to Cooksville Grain
 -- Cooksville issued a joint payee check to Bank and
 -- After landlord did not get his $60,000 rent, he filed a
  complaint against Morefield, Bank and Cooksville.
 Bank asks for an apportionment of the liability
 between the Bank and Cooksville,
 Then they both appealed the summary judgment
 granted Dwyer.

 Bart Evans -- Holding?
 -- The court recognizes that the crop lien takes
  “precedence,” or does it?
 -- Does the crop lien take precedence over the security
  interest in the proceeds for the crop sale?
 -- At the time of this case, the “Illinois Landlord‟s
  Lien” was paramount to (ahead of) all other liens!
 -- and could be lost only by waiver or failing to enforce it
  within the allowed amount of time.

 Holding:
 -- Bank argues that the above superior status was
   prior to adopting the Art. 9 of UCC.
 -- Art. 9 exempts both statutory and landlord’s liens
 -- But, the landlord’s lien remains superior to the Art. 9
  lien--in Illinois. Landlord prevails!!
 Note--Following the recent adoption of a new UCC
  provisions, Illinois law was revised in Aug. 2002 to,
  again, place the landlord‟s lien above the UCC lien‟s.
     Illinois’ Superior Landlord’s Lien
 Every landlord shall have a lien upon the crops grown or
  growing upon the demised premises for the rent thereof,
  whether the same is payable wholly or in part in money or
  specific articles of property or products of the premises, …
  for the period of 6 months after the expiration of the term for
  which the premises are demised, and may be enforced …
 "A good faith purchaser shall, however, take such crops free
  of any landlord's lien unless, within 6 months prior to the
  purchase, the landlord provides written notice of his lien to
  the purchaser by registered or certified mail. Such notice
  shall contain the names and addresses of the landlord and
  tenant, and clearly identify the leased property. …
        Finley v. McClure
          S. Ct. of Kans., „77
 Jeremiah Faulk --- Action?
 Proceeds from a crop growing on a “life
  tenant’s land” at her death.
 Issue? Is the rent share from a growing crop
  at death owned by 1. the life tenant’s estate,
  or 2. remainderman, Finley, or 3. Split
  between life tenant's estate and
        Finley v. McClure
Facts: -- Jessie Riley had a life estate until her
  death on 9-1-73.
 --- She had been leasing the land for a 1/3
  share to Marcy and McCowan.
 -- Finley owned the remainder interest in
  the same farm.
 Riley’s stand-in tenants had sowed wheat
  two weeks before her death.
         Finley v. McClure
 Facts:
 -- The wheat crop was deposited at an elevator
  under the Marcy, McCowan and Finley’s names.
 -- Later without notice to Finley (remainderman)
  the wheat was sold, and 1/3 of the proceeds was
  paid the estate of life tenant, Jessie Riley.
 -- Finley objects, saying the 1/3 of the wheat
  proceeds belongs to him.
 -- Court awarded the share to the decedent’s/life
  tenant’s estate.
               Finley v. McClure

 Jonathan Franks -- Holding & Opinion?
 District court decision affirmed. Ehtel McClure,
  administratrix of the life tenant’s estate, was
  awarded the entire 1/3 proceeds share of wheat.
 The doctrine of emblements answers the question
  at issue.
                  Finley v. McClure

                   36

 The doctrine of emblements is a feature of the common
  law that endures today in Indiana.
 However, states have differed on handling the Finley
  Case situation.
 These states say the title to a growing crop is in the lessee
  (here a stand-in tenant), not the life tenant, (or landowner
  in general).
              Finley v. McClure

 Share rent is not due until harvested, and that share
  belongs to the owner of the land at that time.
 -- but, Kansas did (does) not follow the above
 Rule???
 A tenant (including with a life tenant/landlord) whose
  lease is terminated, without fault, is entitled to the
  profits of the crop(s) growing at the termination.
               Death of a Life Tenant
                     in Indiana
 IC 32-31-1-18
 If a life tenant who has demised (rented out) any lands dies
  on or after the day on which rent is due and payable, the
  executor or administrator of the life tenant's estate may
  recover from the under tenant (stand-in tenant) the whole
  rent due.
 If the life tenant dies before the day on which rent is due:
 (1) the executor or administrator of the life tenant's estate
  may recover the proportion of rent that accrued before (date
  of death); and
 (2) the remainderman may recover the the proportion of rent
  that accrued after; the life tenant's death.
             Federal Income Tax

   By the Forms:
   W-2s and 1099s
   Form 1040 & Schedule A
   Schedules C, D, E, & F
   Schedule SE
   Form 4797
   Form 4835
   And others
    Tax Rules for Social Security and Estate

 Material Participation (MP)
 -- status or level of involvement in the renting of land
 -- so the landlord is “earning” income and “qualified” to
  pay self-employment tax (SE tax) on the Schedule F
  income (“farmer” IRS form), complete a Schedule ( Self
  Employment Tax) SE, and
 -- establish credits for Social Security benefits
 -- note, an operating farmer, does not need the MP concept
  since he or she is actively involved as sort of an
  “independent contractor,”
 -- so he files with IRS on a Schedules F, and SE, to comply
  with the tax law and to earn Social Security benefits.
       Material Participation (MP)

 There are several ways to meet the MP test
 -- See them in the IRS Publ.#225 Farmer’s Tax
  Guide-2001—page 84, Column 3.
 -- In Mid-west, farmland leasing situations the MP
  requirement may, and has been met by the share-
  lease landowner who supplies some of the cost of
  inputs, for a share of the crop (at risk), and has
  authority in the production decisions throughout
  the year.
    Material Participation (MP)

 -- and “exercises that authority.”
 -- -- As point of history, an agent(manager) could
  stand between the landlord, and the tenant and the
  landowner could “materially participate,” I.e., and
  earn social security benefits. Why not?
 May a “farm manager”(agent) satisfy MP
  requirements for a landowner, today?
 Not since 1974.
 Congress changed the rule.
    Material Participation (MP)

There is more to the saga.
 -- If you MP in the earning of your farm income (or
  any other type of income) that income is “active”
  income for Soc. Sec. Retirement purposes.
 Before Jan. 2000 such earnings could cause a loss of
  part of a Soc. Sec. retiree’s benefit!
 Now, that is only true for SS retirees before age 65!
     Material Participation (MP)

 Does MP requirement create a dilemma, or a point of
 Many think at SS retirement, a farmer/landowner must
  switch to cash rent so:
 a. they can stop paying SE tax, and
 b. not have active income from their rental that may be
  sufficient in amount to cause a loss of part of their SS
  retirement income. Is (was) there a middle ground?
          Material Participation (MP)

 A landowner may share lease or and not be Materially
  Participating. If not, why an MP test?
 When they wish not to MP (i. e., retire from farming
  activity either as operators or as MP landlords), and
 They file their share of farm proceeds on a Form 4835
  rather than a Schedule F – that “certifies” they are not
  materially participating in their share lease.
          Material Participation (MP)

 MP will is critical for saving federal estate tax, and
  for “time” to pay tax due on a “closely-held” business
  interest of a decedent.
 MP is required for special use valuation (SUV) of
  land for federal estate tax purpose.
 SUV allows up to $800,000 in a farmland value to be
  removed from a decedents estate tax estate owner’s
  estate ($800,000 as indexed for decedents in 2001).
                Special Use Valuation
                - IRC Section 2032A -

Cash Rent - “Land” tax              = “Ag Use Value”*
“FLB” Interest Rate**

Special valuation notes :
* Both numerator and denominator are five year averages for the five years
   before the year of a decedent’s death, and
“Cash rent minus real estate tax” is for “comparable soils in the
** Published annually in an IRS Revenue Ruling by Farm Credit Bank
   Districts -- St. Paul for Indiana
The five year average interest rate for decedents in Indiana has dropped
   from 9.3% for 1995 estates to 8.12% for 2001 estates.
        Material Participation (MP)

 -- However, a family member may satisfy the MP
  requirement SUV. Likewise,
 -- The FOBID, allowing the deduction of $675,000 in
  business assets from the qualified business owner’s
  federal estate tax estate, requires MP by the decedent or
  by his or her family member.

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