With today’s article, RFD-TV Ag Law & Tax Expert Roger McEowen with the Washburn School of Law surveys more legal and tax issues that farmers and ranchers need to know. Awareness of these vital legal and taxation issues that can arise when conducting business in other states or through an informal partnership is a means of ensuring total operational risk management.
Getting Sued in Another State
International Shoe Company v. State of Washington, 326 U.S. 310 (1945)
Walters v. Lima Elevator Co., 84 N.E.3d 1218 (Ind. Ct. App. 2017)
If you engage in a business transaction involving your farm or ranch in another state, and a lawsuit is filed based on that transaction, does that state’s legal system have jurisdiction over you?
In the 1945 case, International Shoe Company v. State of Washington, 326 U.S. 310 (1945), the U.S. Supreme Court (SCOTUS) said that a party (particularly a corporation or a business) could be sued in a state if the party had “minimum contacts” with that state. Over time, many courts have wrestled with the meaning of “minimum contacts.”
A recent case—Walters v. Lima Elevator Co., 84 N.E.3d 1218 (Ind. Ct. App. 2017)—provides a good illustration of applying the “minimum contacts” theory to farm businesses.
In this case, a Michigan farmer ordered seed from an Indiana elevator about 20 miles away. It was the third time he had done this. He bought the seed on credit, and when it was ready, he went to the elevator to pick it up. When he didn’t pay for the seed, the elevator sued him in the local court in Indiana. He sought to dismiss the case because the Indiana court didn’t have jurisdiction over him. He claimed he lacked sufficient minimum contacts with Indiana to be sued there. The court disagreed. The Michigan farmer had “purposely availed” himself of the privilege of conducting business in Indiana. Because of that, the court reasoned, he could have reasonably anticipated being subject to the Indiana judicial system if he didn’t pay his bill. His due process rights were also not violated – his farm was less than 20 miles from the Indiana elevator.
If you intentionally conduct business in a state and are sued as a result of your contacts and actions with that state, that state’s courts will likely have personal jurisdiction over you.
When is a Partnership Formed?
Carson v. Comr., 2024 U.S. Tax Ct. LEXIS 1624 (U.S. Tax Ct. May 18, 2023).
Farmers and ranchers often do business informally. That informality can raise the question of whether the business arrangement has created a partnership. If that is determined to be the case, numerous legal issues might arise.
A big potential issue is unlimited liability. Partners are jointly and severally liable for the partnership’s debts arising from the partnership business. Also, a partnership files its taxes differently than individuals, and assets deemed partnership assets could pass differently upon the death of someone deemed to be a partner.
So, how do you know if your informal arrangement is a partnership?
From a tax standpoint, if you’re splitting net income from the activity rather than gross, the IRS could claim the activity is a partnership. While simply jointly owning assets is not enough, by itself, to constitute a partnership, if you refer to you and your co-worker as “partners” or create a partnership bank account or fill out FSA documents as a “partnership,” a court could conclude the activity is a partnership. Most crop-share or livestock-share leases are not partnerships, but you must be careful. It’s best to execute a written lease and clearly state that no partnership is intended if you don’t want questions to come up.
The IRS missed asserting that a mother and her daughter had created an informal partnership arrangement in a Tax Court case involving an Oklahoma ranch last year and also lost on a hobby loss argument. Don’t count on the IRS missing the same arguments in your situation.
