Kentucky Fishing Regulations Go Belly Side Up When Faced With Opposition

By: Brian Wood, Production Editor

Kentucky’s fishing industry turned a new chapter during the summer of 2014 when it attempted to impose regulations on trophy sized catfish and those who would catch them.[i] Before that point, there were no regulations in Kentucky on how many trophy catfish a fisherman could pull from the Ohio River.[ii] The call for such regulations came when sport fisherman began to complain that, due to the lack of regulations, commercial fisherman had begun dangerously depleting the overall population of trophy catfish.[iii] The regulations have come about as an attempt by the Fisheries Division of the Kentucky Department Fish & Wildlife Resources to stymie and reverse what officials are worried could be over-harvesting.[iv]

Upon the complaints of recreational fishermen, who asserted that commercial catfishermen were hurting the overall catfish population and quality of recreational fishing, the Department of Fish & Wildlife began investigating the numbers of catfish in the Ohio River.[v] Researchers have found that there are problems of over-harvesting in certain areas of the Ohio River, and the Department of Fish & Wildlife determined that regulations were prudent.[vi] Recreational and competitive fishermen desire to see regulations similar to that of Ohio and West Virginia, though they lack the desire to ban commercial fishing entirely.[vii] Instead, most recreational fishermen petitioned the Department of Fish & Wildlife to promulgate reasonable regulations—not absolute restrictions—which protect the trophy-sized catfish fishery in the Ohio River.[viii]

Given these reasonable requests and its own independent studies of over-harvesting, the Department of Fish & Wildlife did propose regulations over the catfish population in the Ohio River.[ix] Among these regulations was a proposal to restrict the number of significantly large (trophy-sized) catfish that commercial fishermen could catch in a day.[x] Various regulations designed to protect the truly large catfish were approved of and passed, but have yet to make an impact on the fishing industries in the Ohio River. This delayed effectiveness is due to a lawsuit and temporary injunction order filed by a commercial fisherman seeking to rescind the newly minted regulations threatening his livelihood.[xi] As of the writing of this article, no new information regarding the injunction and lawsuit was available.

Despite this setback, the Department of Fish & Wildlife has asserted that it will continue to research the fish population in Kentucky waters and beware of further evidence of over-harvesting.[xii] According to the Department, its focus “is resource first.”[xiii] As resource managers, the Department keeps its focus on conservation while overseeing various types of resource populations and protecting them from negligent and irresponsible over-harvesting.[xiv] According to the studies the Department conducted, the catfish population of the Ohio River is in danger—it is important that the proper scope of acceptable regulations gets determined swiftly, or the Ohio River fishery itself may be at stake.

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[i] Emily Mieure, Catfish Controversy in Kentucky Waters, WDRB.com (Jun. 16, 2014, 9:41 PM), http://www.wdrb.com/story/25775167/catfish-controversy-in-kentucky-waters.

[ii] Id.

[iii] See id.

[iv] See id.

[v] Id.

[vi] Id.

[vii] Steve Douglas, Ohio River Trophy Catfish Populations: Kentucky Holds the Key, American Pro Catters (Jan. 31, 2013, 5:36 PM), http://americanprocatters.com/2013/01/ohio-river-trophy-catfish-populations-kentucky-holds-the-key/.

[viii] See id.

[ix] See Mieure, supra note 1.

[x] Ky. Dep’t of Fish & Wildlife Res., Ohio River Catfish Project 2014 Update, Ky. Dep’t Fish & Wildlife Res., http://fw.ky.gov/Fish/Documents/ohiorivercatfishproject2013.pdf (last visited Mar. 11, 2015).

[xi] See Mieure, supra note 1.

[xii] See id.

[xiii] Id.

[xiv] See id.

EquiLottery a Winner in Kentucky Senate

A bill that would allow the Kentucky Lottery Corp. to implement a shared lottery game based on the results of live horse racing passed through the Kentucky Senate 22-9 on February 13.[i] Senate Bill 74, sponsored by Louisville Republican Julie Raque Adams, moved on to the House where it was posted in Committee but did not move forward.[ii 

The bill, which builds off KRS 154A.065, “spells out integration between lottery terminals and racing pools that is the basis for a game like Equilottery.”[iii] The Equilottery game, which was developed by former GOP chairman Brad Cummings, allows lottery players to purchase a two-dollar ticket from a Kentucky lottery terminal on a live horse race.[iv] The two dollars would be split between a lottery game and the horse race, with the chance of winning both.[v] For example, if an EquiLottery player purchases a trifecta ticket that reads 3-5-8 and the horses come home in that order then the player would win a portion of the EquiLottery pool, split among winning EquiLottery players, and also would win the trifecta paid out by the racetrack.[vi]

The goals of EquiLottery are to boost horseplayer payouts through increases in handle, improve the overall racing product, and provide an innovative new product for the lottery industry.[vii] Revenue forecasts performed by Gaming Laboratories International for the first year of implementation have shown EquiLottery will perform around three-to-four percent of the Kentucky Lottery’s annual revenue, which was more than $850 million in 2014.[viii] That would equate to approximately $25-30 million in revenue. Cummings, a co-founder of the horse industry news site The Paulick Report, said with those numbers that his company would hope to take in between $250,000 and $500,000.[ix]

The EquiLottery bill, which passed unanimously through the Senate Licensing, Occupations, and Administrative Regulations Committee, has received strong support from both sides of the aisle.[x] The bill also has gotten strong support from many industry groups. Officials with the Kentucky Thoroughbred Association, Kentucky Horsemen’s Benevolent and Protective Association, and the Thoroughbred Owners and Breeders Association have told lawmakers their organizations support the concept.[xi]

By: Travers Manley, Staff Member

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[i] EquiLottery Bill Passes Kentucky Senate by Wide Margin, EquiLottery (Feb. 13, 2015), http://www.equilottery.com/articles/%E2%80%9Cequilottery-bill%E2%80%9D-passes-kentucky-senate-by-wide-margin.html.

[ii] Greg Hall, EquiLottery Bill Clears Senate After Hiccup, The Courier-Journal (Feb. 13, 2015), http://www.courier-journal.com/story/horse-biz/2015/02/13/equilottery-bill-clears-senate-after-hiccup/23357687/.  

[iii] EquiLottery Bill Passes Kentucky Senate by Wide Margin, supra note 1.  

[iv] Let’s Get Right to It. How does EquiLottery Work?, EquiLottery, http://www.equilottery.com/how-it-works.html (last visited Feb. 25, 2015).

[v] Greg Hall, Panel Gives Lottery-Racing Bet Unanimous OK, The Courier-Journal (Feb. 10, 2015), http://www.courier-journal.com/story/horse-biz/2015/02/10/panel-gives-lottery-racing-bet-unanimous-ok/23171101/.

[vi] Let’s Get Right to It. How does EquiLottery Work?, supra note 4.  

[vii] EquiLottery, http://www.equilottery.com/ (last visited Feb. 25, 2015).

[viii] Revenue Forecasts, EquiLottery, http://www.equilottery.com/media-kit.html#studies (last visited Feb. 25, 2015).  

[ix] Hall, supra note 5.

[x] Kentucky Senate Committee Unanimously Passes SB74, EquiLottery (Feb. 10, 2015), http://www.equilottery.com/articles/kentucky-senate-committee-unanimously-passes-sb74.html.

[xi] Kentucky Senate Approves EquiLottery Bill, Blood-Horse (Feb. 13, 2015), http://www.bloodhorse.com/horse-racing/articles/90074/equilottery-bill-clears-ky-senate-committee.  

Breeders’ Cup Tax Exemption to Win

By: Kara Beer, Staff Member

Kentucky just passed a bill that will reinstate a tax break for Breeders’ Cup. In October 2015 Keeneland, in Lexington, Kentucky, will host the Breeders’ Cup.[i]  This bill, House Bill 134, will reinstate the pari-mutuel tax exemption that was enacted in 2010, when Churchill Downs in Louisville, Kentucky hosted the Breeders’ Cup.

Racetracks that conduct pari-mutuel wagering on live horse races are required to pay between 1.5 and 3.5% of all money wagered.[ii] However, in 2010, Kentucky enacted KRS 138.510 (which has since been amended), which created tax exemptions on pari-mutuel wagering.[iii] The 2010 bill provided a tax exemption for racetracks that hosted an “international horse racing event in 2010” that distributed $15 million or more in purses during the event.[iv] In addition, the bill required the organization responsible for selecting the location to “contractually agree to conduct the international horse racing event” in Kentucky in 2011 or 2012. [v] Breeders’ Cup signed a contract with Churchill Downs and subsequently the track hosted the event in both 2010 and 2011.[vi] Due to this contract, Breeders’ Cup qualified for the pari-mutuel tax exemption and enjoyed this exemption in both 2010 and 2011.

Prior to the Senate’s approval of the bill, this tax exemption was no longer in effect. The 2010 bill had a caveat in place. The bill stated that after 2013, the tax exemption would remain in effect for the international horse race only if “the event returns within three years of a previously-held international horse racing event.” In order to qualify for this exemption, Kentucky would have to have hosted Breeders’ Cup by the year 2014; however, Santa Anita Park in Arcadia, California hosted it instead in 2014.[vii] The current version of KRS 138.510 mentions nothing about tax exemptions for international horse racing events in the state (in fact, the only tax exemption is for “live harness wagering at a county fair”).[viii]

House Representative David Osborne said this tax exemption will help to put Kentucky on par with other racing states, because Kentucky charges a greater wagering tax than any other state.[ix]  Although this tax exemption will cost the state about $1 million,[x] Breeders’ Cup brought an estimated $53.3 million in revenues across the state in 2010 and thus the enormous economic potential offsets this loss.[xi] However, it is interesting that Governor Beshear approved this bill despite being unable to require Breeders’ Cup to return in the following year, as he did in 2011, because Breeder’s Cup has already announced Santa Anita Park will host the event again in 2016.[xii]

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[i] Breeders’ Cup Announces Keeneland as the Host of 2015 Breeder’s Cup (June 24, 2014), breederscup.com, http://www.breederscup.com/media-center/press-releases/2014-06-24-2.

[ii] KRS § 138.510.

[iii] KRS § 138.510 (amended 2013) available at, http://www.lrc.ky.gov/Statutes/statute.aspx?id=28762.

[iv] Id.

[v] Id.

[vi] Breeders’ Cup Selects Churchill Downs to Host 2011 World Championships, churchilldowns.com (June, 5, 2010), http://www.churchilldowns.com/news/archives/breeders-cup-selects-churchill-downs-to-host-2011-world-championships.

[vii] 2014 Breeders’ Cup World Championship to Be Held At Santa Anita Park, breederscup.com (June 10, 2013), http://www.breederscup.com/article/2014-breeders-cup-world-championships-be-held-santa-anita-park.

[viii] Id. § 138.510(1)(d)

[ix] Gregory Hall, Breeders’ Cup Tax Break Nears Finish, The Courier Journal (Mar. 9, 2015), http://www.courier-journal.com/story/news/politics/ky-legislature/2015/03/09/breeders-cup-tax-break-nears-finish/24668413/.

[x] Bill Offering Tax Break for Keeneland Advances, kentucky.com (Mar. 9, 2015), http://www.kentucky.com/2015/03/09/3736532_bill-offering-tax-break-for-keeneland.html?rh=1.

[xi] Gregory Hall, Keeneland Race Course to Host 2015 Breeders’ Cup, usatoday.com (June 17, 2014), http://www.usatoday.com/story/sports/horseracing/2014/06/17/keeneland-host-2015-breeders-cup/10665599/.

[xii]Braden Lammers, Its Official: Keeneland to Host 2015 Breeders’ Cup Championship, Louisville Business First (June 24, 2014), http://www.bizjournals.com/louisville/news/2014/06/24/its-official-keeneland-to-host-2015-breeders-cup.html.

Mining for Gold: President Obama Seeks to Aid Appalachian Coal Workers

By: Logan Mayfield, Staff Member

The state of Kentucky is the third largest coal producer in the United States behind only Wyoming and West Virginia.[i] Naturally, the recent decline in the coal industry has significantly impacted the Commonwealth’s economy, especially the eastern counties. From August 2013 to September 2014 alone, approximately 18,000 Eastern Kentucky coal employees were laid off of work.[ii] While the “war on coal,” as many refer to it, has received much attention in Kentucky’s political arena, there is one thing most people would agree with regardless of party affiliation—individuals struggling with the transition away from coal are in need of some assistance.

In early February of this year, President Obama released a proposed budget for the 2016 fiscal period.[iii] The proposal includes a plan called POWER Plus, which is specifically designed to aid the Appalachian region and alleviate some of the economic problems caused by the coal downturn.[iv] While specific distribution details have not been released, many individuals and communities in Eastern Kentucky will be eligible for financial assistance if POWER Plus is enacted.[v]

Under the President’s proposal, $20 million will be used to provide job training and new occupations for coal workers who are out of employment.[vi] Additionally, $25 million will be added to the Appalachian Regional Commission’s budget for economic development in the mining towns and cities struggling the most.[vii]  POWER Plus also includes funding designated for environmental repair. As part of the plan, $200 million dollars would be dispersed over a five-year period from the Abandoned Mine Land Fund to clean deserted mines and restore land that has deteriorated as a result of mining throughout the years.[viii] For example, one proposed project is to plant new trees in desolate areas that were once mining zones.[ix] Such activity is not only expected to improve the environment, but to also create jobs for those in need.[x]​

Notwithstanding politics and personal opinions about the feasibility of the President’s proposal, it is encouraging that Kentucky citizens are receiving the national attention they deserve. While it is uncertain how this specific proposal will turn out, I am hopeful that the individuals and families impacted by the downfall of coal will soon be back on their feet.

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[i] U.S. Coal Production by State & By Rank, National Mining Association (Jan. 2015), http://www.nma.org/pdf/c_production_state_rank.pdf.

[ii] Bill Estep, Kentucky coal jobs drop again in 2014, reaching new low, Lexington Herald-Leader (Feb. 4, 2015)  http://www.kentucky.com/2015/02/04/3677495/kentucky-coal-jobs-drop-again.html.

[iii] Heather Moyer, President Obama's Budget Includes Money to Help Appalachian Communities Transition Away from Coal, Sierra Club (Feb. 2, 2015), http://www.sierraclub.org/compass/2015/02/president-obamas-budget-includes-money-help-appalachian-communities-transition-away.

[iv] Katie Valentine, Obama’s Budget Provides Millions For Out-Of-Work Coal Miners, Think Progress (Feb. 2, 2015, 3:26 PM), http://thinkprogress.org/climate/2015/02/02/3618103/power-plus-plan-for-coal-miners/.

[v] Bill Estep, Obama proposes $1 billion lifeline for parts of Appalachia where coal jobs vanished, Lexington Herald-Leader (Feb. 2 2015), http://www.kentucky.com/2015/02/02/3673874/obama-proposes-1-billion-lifeline.html.

[vi] Ken Ward, Jr., Obama’s budget includes coalfields aid, Charleston Gazette (Feb. 2, 2015), http://www.wvgazette.com/article/20150202/GZ01/150209859/1419.

[vii] Id.

[viii] Estep, supra note 5.

[ix] Id.

[x] Id.

Attack of the Clones?: Fifth Circuit Court of Appeals Allows AQHA to Deny Registration of Cloned Horses

By: Zack Mattioni, Staff Member

The cloning of elite horses may seem like the plot of Hollywood’s latest science fiction film, but in reality it is a legitimate, viable operation, albeit one that now faces a major setback.[i] On January 14, 2015, the United States Court of Appeals for the Fifth Circuit reversed a lower court decision that required the American Quarter Horse Association (AQHA), the largest equine membership organization in the world[ii], to include cloned horses in its breed registry.[iii] The AQHA is now free to enforce “Rule 227(a),” originally enacted by its membership in 2004, which categorically denies registration for all clones and their offspring.[iv] 

The current legal battle demonstrates that, in the twelve years since the first successful cloning of a horse[v], the legitimacy of clones remains stubbornly debated. Proponents of cloning argue that it offers a chance to preserve the DNA of champion horses that are deceased or are otherwise unable to reproduce.[vi] This seemingly addresses the fact that many top competitors are geldings, which are often castrated before their exceptional potential is known.[vii] 

The plaintiffs that filed suit against the AQHA also contend that its policy against cloned horses is motivated by a self-serving economic interest.[viii] Their assertion is that some of the most prominent cloning opponents are their potential business rivals, who are solely interested in keeping prices for their own horses high by avoiding competition with other elite animals.[ix] The end result, the plaintiffs claim, is the perpetuation of a monopoly supported only by greed and sham studies.[x]

The AQHA, unsurprisingly, sees things differently. It stresses that cloning frustrates the DNA testing process employed by the breed registry, making it impossible to discern a horse’s lineage.[xi] The AQHA furthermore firmly insists that breeding, not cloning, is the only way to improve each generation of horses.[xii] It warns that the high price of cloning (on average over $150,000) will ensure that only the most elite horses are included in the process.[xiii] Potentially, the continued cloning of these animals would eventually narrow the existing gene pool and result in the exacerbation of known genetic defects, as well as the creation of new ones.[xiv]

It cannot be ignored that cloning entails serious potential harm. Frequently, cloned animals suffer from diseases and developmental abnormalities that prematurely end their lives.[xv] But supporters of the practice believe the benefits outweigh the risks. The International Federation for Equestrian Sports (Fédération Équestre Internationale, or FEI), the international governing body for equestrian sports, recently reversed its 2007 ban on cloned horses, citing the value of keeping superior genetics in the gene pool and the dropping cost of cloning eventually leveling the playing field.[xvi] However, with the AQHA remaining steadfastly devoted to its anti-cloning policy, and its opponents set on appealing the verdict in its favor[xvii], it is clear that an amicable resolution is unlikely in the near future.

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[i] Pat Raia, Appeals Court Rules AQHA Can Reject Clones, The Horse (Jan. 15, 2015), http://www.thehorse.com/articles/35185/appeals-court-rules-aqha-can-reject-clones.

[ii] Mary W. Craig, Mirror, Mirror in the Stall: Animal Cloning and Its Legal Implications for Equine Registry Associations, 5 Ky. J. Equine, Agric. & Nat. Resources L. 273, 281 (2013).

[iii] Id.; AQHA Prevails in Cloning Lawsuit, American Quarter Horse Association (Jan. 14, 2015), http://www.aqha.com/News/News-Articles/2015/January/01142015-Cloning-Lawsuit-Update.aspx.

[iv] Abraham & Veneklasen Joint Venture v. Am. Quarter Horse Ass'n, No. 2:12-CV-103-J, 2013 WL 2297104, at *1 (N.D. Tex. May 24, 2013).

[v] Craig, supra note ii, at 274.

[vi] Mike Brunker, Judge Orders Quarter Horse Association to Register Clones, CNBC (Aug. 13, 2013, 12:53 PM), http://www.cnbc.com/id/100959513#.

[vii] Ollie Williams, Battle of the Clones: When Will a Replica Horse Win Olympic Gold?, CNN (Feb. 20, 2015), http://edition.cnn.com/2015/02/20/equestrian/horse-cloning-olympics/.

[viii] Abraham & Veneklasen Joint Venture, 2013 WL 2297104, at *1.

[ix] Id.

[x] Id. at *1-2.

[xi] American Quarter Horse Association Position Regarding: Abraham & Veneklasen Joint Venture v. American Quarter Horse Association, American Quarter Horse Association (Jan. 14, 2015), http://www.aqha.com/AQHA-Cloning-Lawsuit-Resources/AQHA-Cloning-Position.aspx.

[xii] Id.

[xiii] Id.

[xiv] Id.

[xv] Craig, supra note ii, at 275-76.

[xvi] Bill Chappell, Equestrian Group Clears Way for Cloned Horses to Compete in the Olympics, NPR (Aug. 7, 2012, 3:09 PM), http://www.npr.org/blogs/thetorch/2012/08/07/158373631/equestrian-group-clears-way-for-cloned-horses-to-compete-in-the-olympics.

[xvii] Jim McBride, Pro-Cloning Plaintiffs Want AQHA Win Overturned, Amarillo Globe News (Jan. 14, 2015, 3:45 PM), http://amarillo.com/news/local-news/2015-01-14/appeals-court-rules-aqha-horse-cloning-appeal.

The Demand for a Supreme Court Response: Electric Power Supply Association v. FERC

By: Sandy Manche, Staff Member

Demand response, a “reduction in the consumption of electric energy by customers . . . in response to an increase in the price of electric energy or to incentive payments,”[i] is good for society because it incentivizes reductions in electricity usage, thereby decreasing the use of natural resources.  Did the Federal Power Act (“FPA”)[ii] grant the authority to regulate demand response pricing to the federal or state government?  The Federal Energy Regulatory Commission (FERC) has asked the Supreme Court to rule on this jurisdictional question. 

On March 15, 2011, the FERC issued Order No. 745, requiring independent system operators and regional transmission organizations to pay “market price,” to “demand response resources participating in an organized wholesale energy market,”[iii] for reductions in consumption.[iv] However, the FERC ruling was vacated on March 23, 2014 by the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) in Electric Power Supply Ass’n v. FERC.[v] The D.C. Circuit ruled that the FERC had exceeded its powers.[vi]  Noting that the FPA splits the “jurisdiction over sale and delivery of electricity between the federal government and the states on the basis of the type of service being provided and the nature of the energy sale,”[vii] the court ruled that although demand response “affects the wholesale market,”[viii] the states have exclusive jurisdiction over the regulation of the retail market.[ix]  However, in New York v. FERC[x] the Supreme Court recognized that “the landscape of the electric industry has changed since the enactment of the FPA, when the electricity universe was ‘neatly divided into spheres of retail versus wholesale sales’”[xi] Deregulation continues to change the landscape. 

On January 15, 2015, the U.S. Solicitor General filed a writ of certiorari requesting the Supreme Court to review the ruling in Electric Power Supply Ass’n[xii] The FERC contends  it has authority to “regulate the rules used by operators of wholesale- electricity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments to wholesale rates”[xiii] because, under the Chevron doctrine, the correct interpretation of the statutory text is that the FPA does not deny FERC the authority.[xiv] The FERC argues that the FPA grants it the authority to “regulate any rule, regulation, practice, or contract affecting [a wholesale] rate,” [xv] and that “[t]he payments to demand-response providers” do affect wholesale rates because the payments “are recouped directly from the rates paid by purchasers of wholesale electricity.”[xvi]

Although the issue is whether regulation of demand response pricing is a power granted to the federal government or to the states, the FERC noted that “optimal use of demand response in wholesale-electricity markets . . . is likely to produce lower electricity prices”[xvii] and GTM Research has estimated that the D.C. Circuit court’s decision could reduce demand response growth significantly.[xviii]

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[i] 18 C.F.R. § 35.28 (2015).

[ii] 16 U.S.C. § 791a (2014).

[iii] Order No. 745, Demand Response Compensation in Organized Wholesale Energy Markets, 134 F.E.R.C. ¶ 61,187 (2011).

[iv] Id.

[v] 753 F.3d 216 (D.C. Cir. 2014).

[vi] Id. at  225.

[vii] Id. at 219.

[viii] Id. at 221.

[ix] Id.

[x] 535 U.S. 1 (2002).

[xi] Id. at 16.

[xii] Petition for Writ of Certiorari, Elec. Power Ass’n, 753 F.3d 216 (No. 14-840), available at http://www.ferc.gov/legal/court-cases/appellate-briefs.asp.

[xiii] Id. at I.

[xiv] See id. at 19-21.

[xv] Id. at 20.

[xvi] Id. at 21.

[xvii] Id. at 31. 

[xviii] See Gavin Bade, Obama Administration to Appeal to Supreme Court on FERC Order, Utility Drive (Dec. 8, 2014),  http://www.utilitydive.com/news/obama-administration-to-appeal-to-supreme-court-on-ferc-order-745-ruling/341335/

Don’t Wait for Wheat – Actual Production History Yield Exclusion Included in the 2014 Farm Bill

By: Rebecca Price, Staff Member

Drought that plagued Oklahoma farmers in 2010 continues to affect wheat production today.  In 2013-14, wheat crops harvested a yield of 17 bushels per acre, a major decrease from 31 bushels per acre in 2012-13.[i] Oklahoma’s drought conditions are worsening; in September 2014 communities recorded a 1.26-inch to 2-inch reduction in rainfall from previous years.[ii]  Lack of rain reduces wheat yields, which is both a cash and insurance problem.[iii]  Crop production determines farmers’ eligibility for crop insurance and decreasing yields cause a reduction in insurance coverage.[iv] 

Farmers lobbied for the Actual Production History (APH) Yield Exclusion provision in the 2014 Farm Bill.  The provision allows drought and disaster affected growers to adjust crop production yields for up to six years if an average planted acre of a crop harvested a yield less than fifty percent of the county’s ten year yield average.[v] Representative Frank Lucas, chair of the House Agriculture Committee and author of the 2014 Farm Bill, recognized the need to relieve his fellow Oklahomans and growers around the country.  He publicly prioritized amending the Farm Bill to extend insurance coverage to crop yields from spring 2015 by declaring the provision imperative for farmers facing drought because it is “the difference between having a viable crop insurance for the coming year or not.”[vi]

On October 21, 2014, Agriculture Secretary Tom Vilsack announced that the 2014 Farm Bill included the APH Yield Exclusion and growers affected by drought and disaster would receive insurance relief with crop yields in spring 2015 for select spring crops: corn, soybeans, wheat, cotton, grain sorghum, rice, barley, canola, sunflowers, peanuts, and popcorn.[vii] Vilsack reported  this initiative is part of the United States Department of Agriculture’s “commitment to help rural communities grow” by offering growers financial security in the face of drought and disaster and allowing American consumers to enjoy safe, reasonably priced food.[viii]  The APH Yield Exclusion maintains farmers’ insurance coverage but will likely result in higher premiums for participating farmers.[ix]

The legacy of the APH Yield Exclusion remains unclear.  The Oklahoma Wheat Growers Association reports that members are disappointed with the USDA’s exclusion of fall crops in the APH Yield Exclusion Provision.  Wheat growers believed that fall crops should have been included in the provision.  The Association may push further litigation depending upon the 2014-15 wheat yield.[x]  Also, the lasting political viability of this provision is unknown.  Future chairman of the House Agriculture Committee, Representative Mike Conaway, is ready to begin working on the 2019 Farm Bill by doing a “soup-to-nuts” review of the 2014 Farm Bill and determining what is effective and what is ineffective.[xi]  Depending upon its success of the APH Yield Provision, it may not find a permanent home in American farm legislation.  The immediate wait for wheat insurance is over, however the future of the insurance adjustment is uncertain.

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[i] Chris Clayton, Wheat growers to seek inclusion in APH Yield Exclusion for 2015 – DTN, AGFacts.com (Oct. 21, 2014), http://agfax.com/2014/10/21/wheat-growers-seek-inclusion-aph-yield-exclusion-2015-dtn/#sthash.KT2fzOHc.dpuf.

[ii] Silas Allen, Oklahoma wheat farmers call on federal agriculture officials to enact drought relief policy, NewsOK (Oct. 9, 2014, 3:49 PM), http://newsok.com/oklahoma-wheat-farmers-call-on-federal-agriculture-officials-to-enact-drought-relief-policy/article/5349858/?page=2.

[iii] Oklahoma wheat farmers seek drought loss relief from USDA, Insurance Journal (Oct. 13, 2014), http://www.insurancejournal.com/news/southcentral/2014/10/13/343358.htm.

[iv] Id.

[v] Allen, supra note 2.

[vi] Id.;  Clayton, supra note 1.

[vii]USDA to launch new farm bill program to help provide relief to farmers affected by severe weather, United States Department of Agriculture (Oct. 21, 2014), http://www.usda.gov/wps/portal/usda/usdahome?contentid=2014/10/0233.xml&navid=NEWS_RELEASE&navtype=RT&parentnav=LATEST_RELEASES&edeployment_action=retrievecontent.

[viii] Id.

[ix] Clayton, supra note 1. 

[x] Keith Good, Farm bill; ag economy; and, regulations, FarmPolicy.com (Oct. 22, 2014, 4:06 AM), http://farmpolicy.com/2014/10/22/farm-bill-ag-economy-and-regulations-wednesday/.

[xi] Bill Tomson, Conaway: ready to work on next farm bill, immigration, POLITICO (Nov. 19, 2014, 7:36 PM), http://www.politico.com/story/2014/11/conaway-ready-to-work-on-next-farm-bill-immigration-113023.html.

Whiskey Blues: Kentucky Distilleries Face Class-Action Fueled by Fungus

By: Bridget Kenny, Staff Member

The Kentucky Court of Appeals has put bourbon and bacteria back on the docket.[i] The Louisville-based lawsuit, filed against Heaven Hill Distilleries and Brown-Forman Corporations,[ii] claims vapors from whiskey-aging warehouses are responsible for the filmy black fungus aggravating local residents.[iii] Homeowners and businesses in Shively, Kentucky are among the class of plaintiffs charging the fungus is a nuisance and damages property. [iv]

Baudoinia Compniacensis or “whiskey fungus” results from a chemical reaction to ethanol emissions.[v] Often referred to as the “angels share,” distillers produce these emissions when a portion of ethanol evaporates from each bourbon barrel during the aging process.[vi] Naturally slow growing, the fungus thrives in ethanol-rich environments like Western Louisville’s Bourbon Trail. The result is a build-up of sooty, stinky mold on nearby property.[vii]

A Jefferson Circuit Judge dismissed the initial lawsuit in 2012, finding the Federal Clean Air Act does not permit residents to sue in state court over air quality nuisance issues.[viii] On November 14, 2014, the three-judge panel voted unanimously to overturn the dismissal and send the case back to the lower court for resolution. [ix] A joint statement from Brown-Forman and Heaven Hill states the two distillers are disappointed in the decision and considering an appeal to the Kentucky Supreme Court.[x] The Kentucky whiskey companies are not the only entities facing fungus-related litigation, as similar actions have been filed against liquor distillers in the Virgin Islands and Scotland.[xi]

Distillers argue the whiskey-fungus has existed for centuries, with no known hazardous effect on human health.[xii] Furthermore, despite the unappealing aesthetic covering homes and vehicles, the mold’s effect on property appears to be cosmetic, rather than structural.[xiii] Neighbors and business-owners located near the iconic Bourbon Trail disagree. One plaintiff in particular alleges the fungus has covered his inventory of stadium seating so severely that he is unable to use $25,000 worth of samples to clients.[xiv] 

This case will have important implications for one of Kentucky’s signature industries. Attorney Arthur McMurry seems confident about the lawsuit he filed against Heaven Hill and Brown-Forman.[xv] In reference to the recent enforcement action against international distiller Diageo Americas Supply Inc., McMurry asserted, “This is something that could have, would have, and should have been done, but for politics, politics and more politics.” [xvi] In 2013, the Louisville Metro Air Pollution Control District threatened to fine Diageo Americas $10,000 per day for similar fungus-related complaints. [xvii] The company eventually moved nearly 200,000 barrels of whiskey to facilities out of the area.[xviii] The demand for bourbon is booming, but the result of this litigation may leave local distillers with a bad taste.

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[i]  James Bruggers, Appeals Court revives whiskey fungus lawsuit, Courier-Journal (Nov. 15, 2014), http://www.courier-journal.com/story/tech/science/environment/2014/11/14/appeals-court-revives-whiskey-fungus-lawsuit/19028933/.html

[ii] Id.

[iii] Id.

[iv] Id.

[v] Gregory DL Morris, The Devilish Details in the ‘Angels’ Share, Risk & Insurance, Dec. 2013, http://www.riskandinsurance.com/the-devilish-details-in-the-angels-share.html.

[vi] Id.

[vii] Id.

[viii] James Bruggers, Appeals Court revives whiskey fungus lawsuit, Courier-Journal (Nov. 15, 2014), http://www.courier-journal.com/story/tech/science/environment/2014/11/14/appeals-court-revives-whiskey-fungus-lawsuit/19028933/.html

[ix] Id.

[x] Lawsuit over fungus from whiskey vapors revived, Lexington Herald-Leader (Nov. 15, 2014), http://www.kentucky.com/2014/11/15/3540140_lawsuit-over-fungus-from-whiskey.html

[xi] Id.

[xii] Lawsuit over fungus from whiskey vapors revived, Lexington Herald-Leader (Nov. 15, 2014), http://www.kentucky.com/2014/11/15/3540140_lawsuit-over-fungus-from-whiskey.html

[xiii] Id.

[xiv] Id.

[xv] James Bruggers, Appeals Court revives whiskey fungus lawsuit, Courier-Journal (Nov. 15, 2014), http://www.courier journal.com/story/tech/science/environment/2014/11/14/appeals-court-revives-whiskey-fungus-lawsuit/19028933/.html

[xvi] Id.

[xvii] Id.

[xviii] Lawsuit over fungus from whiskey vapors revived, Lexington Herald-Leader (Nov. 15, 2014), http://www.kentucky.com/2014/11/15/3540140_lawsuit-over-fungus-from-whiskey.html

Deductions on Mr. Ed: A Taxpayer’s Struggle to Recover Hobby Losses

By: Juliya Grigoryan, Staff Member

Apparently, one way to ensure an above-the-line (most favorable) deduction on your taxes is to spend an insatiable amount of time, energy, and money at a “trade or business” you don’t enjoy.  Disclaimer—this sentiment is not related verbatim from the tax code. Nevertheless, it is true that a § 162 above-the-line deduction is only available for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business [emphasis added].”[i] 

One of the pertinent evaluations in determining whether an expense arose out of a trade or business, rather than a mere hobby, is the taxpayer’s profit-seeking endeavors.[ii] This matters to the IRS because it wants to prevent taxpayers from simply disguising their hobbies (which are largely not deductible) as a trade or business for the purpose of minimizing their taxable income.[iii] 

However, § 183 of the tax code provides for a rebuttable presumption that horse breeding is a for-profit activity if it generates a profit in two or more of the last seven consecutive years.[iv] If a profit is not generated within this time frame, a taxpayer can still make an argument that the activity was for profit.[v] Most recently, a case out of Illinois demonstrates a taxpayer’s attempt show that her horse breeding activity was for profit, despite not actually generating profit.

Estate of Stuller v. United States, concerns a taxpayer who in the mid-1980s decided to breed horses for profit, under the company name “Rockin S Ranch” (LSA).  Unfortunately for her, the law inherently values substance over form.[vi] In other words, it matters little that she “cries profit!” if her actions would lead a court to believe otherwise.  The court in this case looks at a variety of factors and ultimately determines that she was not breeding horses for profit, and thus, was unable to take § 162 deductions.[vii] 

The “most important” factor, according to the court, is the “manner in which the taxpayer carries on the activity.”[viii]  The court emphasizes that despite the taxpayer’s substantial losses, she did nothing to change her methods to yield more favorable results. She did not seek business advice or employ new marketing techniques.[ix]  In fact, she did very little to market her business in the first place.[x] In a period of six years, she spent only $50 in marketing.[xi]  

Another noteworthy factor is a taxpayer’s financial status.[xii] The fact that she was even in a position to claim $34,000 worth of losses per year, yet still be financially secure, would indicate that horse breeding was not her main source of income.[xiii] The court found that her primary source of income resulted from the ownership of three Steak n’ Shake franchises.[xiv]  Although it is common for people to have multiple “trades or businesses” from which they derive income, it is unlikely for a court to find that a taxpayer entered into an endeavor for profit if they are content with constant losses.

What can be learned from this case?  First, if your hobby is getting too expensive, creating a faux “business” for it will not redeem you any of the losses.  Quit while you’re ahead.  Second, the courts will look at many factors to determine whether conduct rises to the level of trade or business, and thus, the Section 183 presumption can be overcome.  Last, apparently fast food franchises are incredibly lucrative businesses. Look into it.

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[i] 26 U.S.C. § 162.

[ii] Estate of Stuller v. United States, No. 11-3080, 2014 WL 3734328, at *4 (C.D. Ill. July 22, 2014 (citing Nickerson v. Commissioner, 700 F.2d 402, 405 (7th Cir. 1983)).

[iii] See Id.

[iv] 26 U.S.C. § 183.

[v] 26 C.F.R. § 1.183-1(c).

[vi] Id. at *2.

[vii] Id. at *22.

[viii] Id.

[ix] Id.

[x] Id.

[xi] Id. at *8.

[xii] Id. at *20.

[xiii] Id. at *12.

[xiv] Id. at *19.