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Feb 10-12

National Council ofFarmer Cooperatives

Legal, Tax, & Accounting

Conference

Tel: 202-626-8700 Fax: 202-626-8722

50 F Street, NW Suite 900 Washington, DC 20001

www.ncfc.org

Representing the Business Interests of Agriculture

To: Legal, Tax and Accounting Committee Members and Guests Welcome to Phoenix! I think you’ll find that we have a great lineup of topics and speakers this year. The conference program qualifies for CLE and CPE credits, so remember to sign-in each day for credit. The CFO Roundtable will take place on Wednesday afternoon from 2:00-5:00 in Kierland 1A. All CFOs are invited to attend. Conference participants, spouses, and guests are invited to attend the Welcome Reception from 6:00pm – 8:00pm on the Northern Sky Terrace. On Thursday morning the LTA sessions open with an informal roundtable discussion of current tax developments in the Powell room from 7:00 to 8:15 – all are welcome and breakfast will be provided. The LTA Conference begins on Thursday morning at 8:30 with participation in the NCFC General Session in the Kierland Grand Ballroom 1/2/3. The LTA session starts at 10:30a.m. right next door in Kierland 4B/C. Please plan to attend the Cooperators reception on Thursday evening from 6:00-8:00 in the Trailblazers Ballroom C/D/E; spouses and guests are also welcome. On Friday morning you are invited to hear Terry Barr give his economic outlook for 2016 in the Paradise Ballroom from 7:00 to 8:15. A plated breakfast will be served. The LTA Conference begins at 8:30 in Kierland 4B/C and ends at noon. NCFC welcomes your feedback on all aspects of the conference, so please take the time to complete the evaluation form you will find on your chair each day or provide feedback within the conference app. If you need additional information or assistance, please contact my assistant Stefanie Hallett at 202-344-6513 or see the NCFC staff at the registration desk. Best regards,

Marlis Carson Senior Vice President & General Counsel

Tel: 202-626-8700 Fax: 202-626-8722


www.ncfc.org


2015 LTA Committee Acknowledgments LTA Committee members contributed significant time and expertise to NCFC and the activities of the LTA Committee in 2015. The Executive Committee would like to especially thank the following committee members for their contributions. Bylaw Working Group Early in 2015, members of the LTA Committee began work on a set of model bylaws for cooperatives to serve as guidance for NCFC members. The group plans to develop sample bylaw provisions and commentary on tax, securities, membership eligibility, voting rights, board composition, escheat, operating on a cooperative basis, and other topics. The working group will present the findings at a future LTA conference. Working Group Members: Teree Castanias, CPA (Co-Chair) Charlie Sullivan, Bond Schoeneck & King PLLC (Co-Chair) Todd Eskelsen, Schiff Hardin LLP Bob Glass, Land O’ Lakes Inc. Daniel Hall, GROWMARK, Inc.

John Kenley, Northwest Dairy Association/Darigold Eric Krienert, Moss Adams LLP Daniel Mott, Fredrikson & Byron, P.A. Ronald Peterson, Hanson Bridgett LLP David Swanson, Dorsey & Whitney LLP

Section 199 Working Group The Section 199 Working Group continues to monitor legislative, regulatory, and case developments involving the Section 199 deduction. In 2015 the group had the opportunity to draft and submit comments to Treasury on proposed regulations under Section 199. Working Group Members: George Benson, McDermott Will & Emery LLP (Co-Chair) Teresa Castanias, CPA (Co-Chair) Kevan Acord, BridgeBuilder Tax & Legal Services David Antoni, KPMG LLP Stan Dvorak, CHS, Inc. Robert Glass, Land O' Lakes, Inc. James Heine, CHS Inc.

Brett Huston, KPMG LLP Ron Kottke, Land O' Lakes, Inc. Eric Krienert, Moss Adams LLP Christine Lau, Sunsweet Growers, Inc. Greg Lawler, GROWMARK, Inc. Lisa Maloy, American Crystal Sugar Company Carrie Parrish, Sunkist Growers, Inc. Dan Schultz, Cooperative Consulting, LLC

Tel: 202-626-8700 Fax: 202-626-8722


www.ncfc.org


2015 LTA Committee Acknowledgments (continued) IC-DISC Working Group Farmer cooperatives would like to utilize Interest-Charge Domestic International Sales Corporations (IC-DISCs) to receive favorable tax rates on exports of commodities. However, IRS regulations do not specify how farmer cooperatives and their members should calculate the amount of income eligible for the preferred tax treatment. A working group of LTA Committee members is providing input as NCFC urges Treasury to provide guidance on how farmer cooperatives can best obtain the benefits of this export-promoting tax code provision. LTA members and NCFC staff met with IRS, Treasury, White House, and USDA officials June of 2015 to discuss this issue, and NCFC staff has followed up with meetings with Senate Finance Committee staff. Treasury officials have said they will decide soon whether to issue guidance applicable to farmer cooperatives. Working Group Members: David Antoni, KPMG LLP Sharon Appelt, Northwest Dairy Association/Darigold Braden Bender, Sun-Maid Growers LLP George Benson, McDermott Will & Emery LLP Larry Boyle, Ocean Spray Cranberries Inc. John Caragozian, Sunkist Growers, Inc. Teresa Castanias, CPA Conrad Davis, Crowe Horwath LLP

Eric Krienert, Moss Adams LLP Kevin Feeley, McDermott Will & Emery LLP Bob Glass, Land O’ Lakes Inc. Christine Lau, Sunsweet Growers, Inc. Dean LaVallee, Blue Diamond Growers Ana Klein, Sunsweet Growers, Inc. Brian Powell, Moss Adams LLP

http://www.forbes.com/international/

Tel: 202-626-8700 Fax: 202-626-8722


www.ncfc.org


2015 LTA Committee Acknowledgments (continued)

We would also like to thank the chairs and vice chairs of the LTA Subcommittees, discussion forums, and working groups. They are responsible for writing annual subcommittee reports and/or providing leadership on a wide variety of topics.

Chairs and vice chairs include:

David Longinotti, Hanson Bridgett LLP Kimberly Lowe, Fredrikson & Byron, P.A. Lisa Maloy, American Crystal Sugar Company Jay McWatters, Dopkins & Company LLP David Moss, Tennessee Farmers Cooperative Daniel Mott, Fredrikson & Byron, P.A. Sue Ann Nelson, Fredrikson & Byron, P.A. Chris Ondeck, Proskauer Rose LLP Ronald Peterson, Hanson Bridgett LLP Daniel Schultz, Cooperative Consulting LLC David Simon, Attorney-At-Law Richard Stamm, Ocean Spray Cranberries, Inc. Charles Sullivan, Bond Schoeneck & King PLLC David Swanson, Dorsey & Whitney LLP Alan Weinstein, CoBank Joe Werstak, United Producers Inc. Randon Wilson, Jones Waldo Holbrook & McDonough Stephen Zovickian, Bingham McCutchen LLP

David Antoni, KPMG LLP Marla Aspinwall, Loeb & Loeb LLP Donald Barnes, Porter Wright McMorris & Arthur LLP George Benson, McDermott Will & Emery LLP Brent Bostrom, GROWMARK, Inc. Kimberly Bram, Southern States Cooperative Inc. Andrew Brown, Dorsey & Whitney LLP Teresa Castanias, Teresa Castanias, CPA Richard Cisne, Hudson, Cisne & Co. Terry Costello, Costello Law Firm John Cowell, Ocean Spray Cranberries, Inc. Todd Eskelsen, Schiff Hardin LLP Robert Glass, Land O' Lakes Inc. Dan Hall, GROWMARK, Inc. Julian Heron, Tuttle Taylor & Heron Brett Huston, KPMG LLP William Hutchison, Lane Powell PC Barry Jencik, Greendyke Jencik & Associates CPAs, PLLC Ana Klein, Sunsweet Growers, Inc. Michael Lindsay, Dorsey & Whitney LLP

With our appreciation,

2015 LTA Executive Committee Richard Cisne, Chair Kevin Feeley Alan Weinstein

2016 LTA Conference Attendees Name Company Anthony Aaron Ice Miller LLP Kevan Acord BridgeBuilder Tax + Legal Services PA David Antoni KPMG LLP Sharon Appelt Darigold, Inc. Tricia Arnold Alabama Farmers Cooperative, Inc. Josep Barenys Michigan Milk Producers Association Donald Barnes Porter Wright Morris & Arthur David Barrett Barrett, Easterday, Cunningham & Eselgroth LLP Braden Bender Sun-Maid Growers of California George Benson McDermott Will & Emery LLP Scott Blickenstaff Amalgamated Sugar Company Brent Bostrom GROWMARK, Inc. Larry Boyle Ocean Spray Cranberries, Inc. Jeff Brandenburg CliftonLarsonAllen LLP David Buck AKT, LLP David Burlage CoBank Linda Buss West Central John Caragozian Sunkist Growers, Inc. Teresa Castanias Teresa Castanias CPA Amy Chambers KFSA Dick Cisne Hudson, Cisne & Co. CPA's Kevin Cody Dairy Farmers of America, Inc Robert Condron MFA Oil Company Renee Cool Dairy Farmers of America, Inc. William Covey GROWMARK, Inc. Jon Cowell Ocean Spray Cranberries, Inc. Andrew Dallas Riceland Foods, Inc. Conrad Davis Crowe Horwath LLP Casey Delaney Welch's Robert Dowd Griswold LaSalle Cobb Dowd & Gin Russell DuBose D. Williams &Co, PC, CPAs Chris Duggan Dorsey & Whitney LLP Carolyn Eselgroth Barrett, Easterday, Cunningham & Eselgroth LLP Todd Eskelsen Schiff Hardin LLP Gail Faries D. Williams &Co, PC, CPAs Kevin Feeley McDermott Will & Emery LLP Philip Fileri Harter Secrest & Emery LLP Michael Fincher Deloitte Tax LLP Jo Ann Fuller Alabama Farmers Cooperative, Inc. Dennis Gardiner Gardiner Thomsen CPAs Mark Gardiner Gardiner Thomsen CPAs John Gerken West Central Robert Glass Land O'Lakes, Inc. Jon Greeley NORPAC Foods, Inc James Griggs Saalfeld Griggs PC Barry Groebel Herbein+Company, Inc. Tara Guler Baker Tilly Virchow Krause, LLP Daniel Hall GROWMARK, Inc. Jennie Haverkamp CoBank

Jim Heine CHS Inc. William Hendry Florida's Natural Growers Robert Hensley Dorsey & Whitney LLP Julian Heron Blue Diamond Growers Todd Hoppe Foster Swift Collins & Smith P.C. Shannon Huff Tennessee Farmers Cooperative Amy Humphreys Northwest Dairy Association/Darigold, Inc. Brett Huston KPMG LLP Bill Hutchison Lane Powell PC Vanessa Jacobsen Eimer Stahl LLP Peter Janzen Land O'Lakes, Inc. Edward Kacsuta U.S. Tobacco Cooperative Inc. Richard Kasper Minn-Dak Farmers Cooperative Patrick Kautzman Eide Bailly LLP John Kenley Northwest Dairy Association/Darigold, Inc. Dustin Klinger Thede Culpepper Moore Munro & Sillman LLP Eric Krienert Moss Adams Eric Kroll Baker Tilly Virchow Krause, LLP Peter Latham Florida's Natural Growers Dean LaVallee Blue Diamond Growers Michael Lensmire CliftonLarsonAllen LLP Michael Lindsay Dorsey & Whitney LLP David Longinotti Hanson Bridgett LLP Mashenka Lundberg CoBank Lisa Maloy American Crystal Sugar Company Mike Mayhew CliftonLarsonAllen LLP Sandra Morgan Riceland Foods, Inc. David Moss Tennessee Farmers Cooperative Dan Mott Fredrikson & Byron, P.A. Sue Ann Nelson Fredrikson & Byron, P.A. Marissa Nelson PwC Chris Ondeck Proskauer Rose LLP Jill O'Toole Shipman & Goodwin LLP Daniel Otto Minn-Dak Farmers Cooperative Mike Perda Welch's Ronald Peterson Hanson Bridgett LLP Brynjar Peterson Northwest Dairy Association/Darigold, Inc. Bill Pieper Land O' Lakes, Inc. Zeb Rocha Pacific Coast Producers Steve Rosenau American Crystal Sugar Company Ron Rufener AKT, LLP Naomi Schefcik Oregon Cherry Growers, Inc. Harold Schenker Sunsweet Growers Inc. Scott Simmelink Ag Processing Inc Rebecca Smith CliftonLarsonAllen LLP Keith Spackler Ag Processing Inc Richard Stamm Ocean Spray Cranberries, Inc. S. Eric Steinle Martindell Swearer Shaffer Ridenour Sheilah Stewart Land O'Lakes, Inc. Matt Strong Pacific Coast Producers Dave Swanson Dorsey & Whitney LLC Chuck Telk Gardiner Thomsen CPAs

Sarah Tucher Fredrikson & Byron, P.A. Rick Vanderheiden West Central Teresa Warne American Crystal Sugar Company Rocky Weber Nebraska Cooperative Council Alan Weinstein CoBank Greg Wickham Dairy Farmers of America, Inc Caleb Williams Saalfeld Griggs PC Randon Wilson Jones Waldo Holbrook & McDonough James Zappa CHS Inc. Stephen Zovickian Morgan, Lewis & Bockius LLP

Agenda

1

WEDNESDAY, FEBRUARY 10

2:00–5:00pm CFO Roundtable Kierland 1A Moderated by: Joe Werstak, CFO, United Producers, Inc. 6:00–8:00 Welcome Reception Northern Sky Terrace

Attendees and guests are welcome.

THURSDAY, FEBRUARY 11 7:00–8:30am Cooperative Tax Roundtable Powell Moderated by: Teree Castanias, CPA Breakfast served. 8:30–10:15 LTA Conference Participation in NCFC General Session I 10:30-Noon LTA General Session I Kierland 4BC

Moderated by: Dick Cisne, Partner, Hudson, Cisne & Co.

10:30-10:50 Welcome and Self Introductions

USDA Cooperative Law Research Developments Featuring: Meegan Reilly Moriarty, Legal Advisor,

USDA Rural Business-Cooperative Service

10:50-12:00pm DOL and EEOC: Staying on Top of Enhanced Enforcement Initiatives Moderated by: Daniel Mott, Shareholder, Fredrikson & Byron

Featuring: Joe Bontke, Outreach Manager and Ombudsman, Houston District Office

United States Equal Employment Opportunity Commission John Kuenstler, Partner, Barnes &Thornburg 12:15–1:45 General Session Luncheon

AGENDA National Council of Farmer Cooperatives

Legal, Tax & Accounting Conference Westin Kierland, Phoenix, AZ

February 10-12, 2016

2

12:15–1:45 LTA In-House Luncheons (By invitation only) CFO Working Group Powell In-House General Counsels Cushing A

Tax Directors Forum Cushing B 2:00-4:50 LTA General Session II Kierland 4BC

Moderated by: Kevin Feeley, Partner, McDermott Will & Emery

2:00-2:50 The Tri-State Case: Is a Federated Cooperative Liable for Its Members’ Actions? Featuring: Ty Thompson, Vice President & Deputy General Counsel for

Director and Member Legal Services, NRECA Jay Sturhahn, Member, Sherman and Howard, LLC

2:50-3:40 The Making of a Gross Receipts Tax Exemption

Featuring: Dan Coyne, Darigold Sharon Appelt, Tax Director, Darigold

3:40–4:00 Break 4:00-4:50 Capper-Volstead and Activist Consumers: How to Operate Under the Immunity Featuring: Chris Ondeck, Partner, Proskauer Rose LLP 5:30–7:30pm Cooperators Reception Trailblazers C/D/E Attendees and guests are welcome.

FRIDAY, FEBRUARY 12 7:00-8:15am LTA Conference Participation in NCFC General Session II Kierland 2 Economic Outlook Featuring: Dr. Terry Barr, Senior Director, Knowledge Bank, CoBank Breakfast served. 8:30-Noon LTA General Session III Kierland 4BC

Moderated by: Dick Cisne, Partner, Hudson, Cisne & Co. 8:30-9:20 Washington Update

Featuring: Lisa Van Doren, Vice President and Chief of Staff, Government Relations, NCFC

9:20-10:10 Accounting Standards Update: Revenue from Contracts with Customers Moderated by: David Antoni, Tax Managing Director, KPMG LLP Featuring: Catherine Lee, Director, Advisory, KPMG LLP Eric Lucas, Principal, Tax and Accounting Group, KPMG LLP 10:10-10:20 Break

3

10:20-11:10 The Vermont Food Labeling Law: Clear as Mud Featuring: Karin Moore, Vice President and General Counsel, Grocery Manufacturers Association 11:10-Noon Cooperative Tax Update Featuring: George Benson, Partner, McDermott, Will & Emery Noon Gavel Exchange: Dick Cisne to Kevin Feeley 12:30-2:00pm LTA Executive Committee Lunch Cushing A

DOL and EEOC

DOL and EEOC: Staying on Top of Enhanced Enforcement Initiatives

MODERATOR BIOGRAPHY Daniel Mott Shareholder Fredrikson & Byron, P.A. Daniel Mott is a shareholder in Fredrikson & Byron’s Corporate Group and leads the firm’s Cooperative & Agribusiness Group. Dan works throughout the country with both large and small cooperatives and other businesses. Dan also advises clients on securities, tax and anti-trust issues that are unique to cooperatives and other member-owned organizations. Dan is a frequent speaker on structure and governance issues affecting cooperatives, including the use of new cooperative/LLC hybrid statutes in place in a number of states. Dan is an experienced “general counsel” and assists his clients in achieving their business objectives in the context of the increasingly complex legal environment in which businesses operate today. Dan counsels his clients by providing practical, business oriented advice that can be utilized in making decisions that have legal implications. Dan is the past chair of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives, and the Subcommittee on Venture Capital, Capital Formation and Financial Structures. Dan is a director and past Chairperson of the United Hospital Foundation in St. Paul and currently serves as the Chair of Innovative Quality Schools, an authorizer of public charter schools.

PRESENTER BIOGRAPHIES John Kuenstler Partner Barnes & Thornburg LLP John F. Kuenstler is a partner in the Chicago and Los Angeles offices of Barnes & Thornburg LLP and a member of the Labor and Employment Department. John dedicates his practice exclusively to the representation of employers in labor and employment and business matters. He counsels and represents a diverse client base on a national and regional basis in virtually all aspects of labor and employment law, including defense of wrongful discharge, discrimination, sexual harassment, retaliation, Title VII, ADA, ADEA, Section 1981, FMLA, FLSA, ERISA, USERRA, WARN and OSHA claims in federal and state courts and administrative agencies, as well as collective and class actions. John routinely represents management’s interests in workplace tort, breach of contract, non-compete, non-solicitation and other restrictive covenant cases. He is experienced in various forms of alternative dispute resolution, helping clients avoid the costs of prolonged legal disputes. In addition to his litigation practice, John also represents clients at all levels of administrative proceedings, including matters before the EEOC, NLRB, OSHA, and DOL. For clients with organized workforces or those striving to remain union free, John acts as the lead company negotiator for collective bargaining, defends employers in union grievance hearings and arbitrations, helps craft union avoidance campaigns, and counsels on a range of issues that can arise under the NLRA.

John has guided employers through workforce reorganizations, reductions in force, mass layoffs, plant closings, wage and hour investigations, and whistleblower claims, avoiding litigation through proactive responses and creative business strategies. He provides counseling on matters such as employment practice audits, effective human resources strategies and reviewing and drafting employment policies, social media policies, handbooks, employment contracts, independent contractor agreements, employee leasing agreements and severance agreements. To assist in effective implementation of best practices policies, John provides training and seminars to managers on all matters that impact the employment relationship. John was selected as a 2012 BTI Client All-Star by the BTI Consulting Group, Inc., being one of merely 272 lawyers nationwide to receive this recognition. He is a member of the American, Illinois, and Chicago Bar Associations, the Bar Association of Metropolitan St. Louis, and the Society for Human Resource Management. Joe Bontke Outreach Manager and Ombudsman, Houston District Office United States Equal Employment Opportunity Commission Joe Bontke is the outreach manager and ombudsman for the Houston District office of U.S. Equal Employment Opportunity Commission. Joe has been in the field of Human Resources & Civil Rights for the past 27 years and has experience in employment law and adult education. With a Bachelor's in Philosophy and a Masters in Education, he has been a Human Resources Director, a Training Coordinator for the American Disabilities Act (ADA) Technical Assistance Center for Federal Region VI, was appointed as Assistant Professor at Baylor College of Medicine and recently has been named Chair of the Governors’ Committee for People with Disabilities by Governor Rick Perry. Using his entertaining style, Joe has educated groups throughout the country and most recently, his work at the EEOC has enabled him to empower employers and employees with the understanding they need to work effectively at their jobs. Joe's philosophy of education is - that 90% is knowing where to find the information ... when you need it.

CONFIDENTIAL © 2016 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

How to Avoid FLSA Lawsuits DOL Notice of Proposed Rulemaking DOL Guidance on Independent Contractors February 11, 2016

John F. Kuenstler (312) 338-5924 [email protected]


Wage and Hour Lawsuits • Wage and Hour Lawsuits are on the rise; why? Because

there is significant money to be made by plaintiffs’ attorneys

• Damages for Wage and Hour lawsuits are greater than damages for discrimination cases because the lawyer typically represents more than one plaintiff (class actions); availability of unlimited double damages; and damages are limited in discrimination suits

• Federal and state governments focus on this issue • Wage and Hour lawsuits can be brought under the

federal Fair Labor Standards Act (“FLSA”) or based on state wage and hour laws


FLSA Lawsuits • What leads to FLSA lawsuits?

– Misclassification of employees as exempt from overtime

– Requiring/allowing off the clock work (running errands, getting supplies, working before clocking in, or working after clocking out including checking e-mail)

– Bad recordkeeping – These are all things an employer can fix and avoid


FAIR LABOR STANDARDS ACT


This Sounds Easy, Right?

• Federal law governing the payment of minimum & overtime wages.

• Covered, non-exempt employees must receive one and one-half his/her regular rate of pay for all hours worked over 40 in a workweek.

• Compliance is determined by workweek and each workweek stands by itself (7 consecutive 24 hour periods --168 hours).


AS IF THIS IS NOT ENOUGH! TWO POSSIBLE HAZARDS THAT LIE AHEAD


PROPOSED CHANGES TO WHITE COLLAR EXEMPTIONS


June 30, 2015: Proposal • Proposed changes to white collar

exemptions by focusing on salary threshold

• According to DOL Secretary Thomas Perez: “employers have a range of options in terms of how to comply. That’s why it’s difficult to predict with precision what the economic effects will be.”

• DOL has made staggering prediction: “We believe, given our study of the literature that, on an annual basis, workers will get roughly $1.2 to $1.3 billion in additional wages as a result of this rule.”


Notice of Proposed Rulemaking • Issued June 30, 2015 • Proposed salary increase:

– From $455/week to $970/week – From $23,660/year to

• Proposed change for highly compensated employees: – From $100,000/year to $122,148/year

• DOL wants to institute automatic increases so that the salary level keeps pace with inflation

• The DOL has not proposed changes to the duties test, but it has implied that such changes might be in the final rule; (CA rule: 50% of duties must be exempt)


Notice of Proposed Rulemaking • DOL says that this is a “critical first step toward

ensuring that hard-working Americans are compensated fairly and have a chance to get ahead”

• DOL estimates that proposed changes to the white collar exemption requirements will result in approximately workers becoming eligible for overtime

• DOL accepted written comments through September 4, 2015

• The final rule is predicted to be issued in mid to late 2016; likely a short window of 60-120 days for implementation; need to start planning now


SO WHAT THE HECK ARE “WHITE COLLAR EXEMPTIONS” ANYWAY?


White Collar Exemptions • The most common FLSA minimum wage and OT

exemption is the “White Collar” exemption that applies to certain job classifications: – Executive Employees; – Administrative Employees; – Professional Employees; – Outside Sales Employees; – Computer-related Employees; and – Highly-Compensated Employees.


White Collar Exemptions • Three tests for white collar exemption:

– Salary Level Test – Salary Basis Test – Job Duties Test – Why are these important; failure to comply results in liability

which can be significant

• Salary Level Test – For most employees, the minimum salary level required for

the exemption is $455/week (proposed increase to $970/week)

– Annual equivalent: $23,660 (proposed increase to $50,440)


White Collar Exemptions • Salary Basis Test

– Regularly receives a predetermined amount of compensation each pay period (on a weekly or less frequent basis).

– The compensation cannot be reduced because of variations in the quality or quantity of the work performed.

– Must be paid the full salary for any week in which the employee performs any work.

– Need not be paid for any workweek in which no work is performed. – An employee is not paid on a salary basis if deductions from the

predetermined salary are made for absences occasioned by the employer or by the operating requirements of the business.

– If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.


White Collar Exemptions • Job Duties Test – Executive Duties

– Primary duty is management of the enterprise (or a customarily-recognized department or subdivision);

– Customarily and regularly directs the work of two or more other full-time employees; and

– Has the authority to hire or fire other employees (or, at least, the recommendations that the “executive” makes as to hiring, firing, advancement, promotion or other change of status must be given particular weight).


White Collar Exemptions • Job Duties Test – Administrative Duties

– Primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

– Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

– This is the most difficult test


White Collar Exemptions • Examples of Administrative Exempt Employees

include the Following: – Insurance claims adjusters – Financial services industry employees – Team Leaders – if the team is tasked with completing

major projects for employer – Executive/Administrative Assistant – if the employee has

authority over matters of significance, without prescribed instructions or procedures (higher level duties, not just clerical)

– HR Managers – Office Managers


White Collar Exemptions • Job Duties Test – Professional Job Duties

– Primary duty is the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.

– Primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

• Predominately intellectual in character. • Includes work requiring the consistent exercise of discretion and

judgment. • The advanced knowledge is generally used to analyze, interpret or

make deductions from varying facts or circumstances. • Not work involving routine mental, manual, mechanical, or physical

work.


“White Collar Exemptions” • Occupations with recognized professional status include the

following: – Doctors; – Registered Nurses; – Lawyers; – Teachers; – Accountants; – Pharmacists; – Engineers; – Actuaries; – Chefs; – Certified Athletic Trainers; and – Licensed Funeral Directors or Embalmers.


“White Collar Exemptions” • Highly Compensated Employees defined as

follows: – Receives total annual compensation of at least

$100,000; proposed increase to $122,148 with upward adjustments for inflation

– Receives at least $455 per week on a salary or fee basis; proposed increase to $970/week

– Performs office or non-manual work; and – Customarily and regularly performs any one or more

of the exempt duties identified in the standard tests for the executive, administrative or professional exemptions.


Planning for Proposed Changes to White Collar Exemption Requirements • Employers will face many complicated issues

as a result of the proposed changes • Employers should be considering these issues

now because of the impact they will have on budget, operations, staffing, and resources

• Employers should plan as much as possible, but do not make any final decisions until the final rule is announced


Auditing Exempt and Non-Exempt Positions • Employers should seriously consider conducting an

audit of all job classifications • Determine whether audit will be conducted under the

attorney-client privilege • Does the position meet the current duties test? • If not, will this rulemaking be good “cover” for

reclassification? • Are there currently exempt employees who earn less

than the new salary level in the proposed rule? • Are there positions with employees both above and

below the new salary level? If so, is it important to keep them all in the same classification?


Classifying Currently Exempt Employees Who Are Below the New Salary Level • Employers should review their exempt

workforce and identify those employees who earn less than the new salary level

• Employers should determine whether employees will receive a salary increase to maintain exempt status

• Employers should determine (on a preliminary basis) which employees will be converted from exempt to nonexempt status


Negative Impact on Workplace Morale • Reclassifying workers as nonexempt will likely have a

negative impact on employee morale • Many employees perceive reclassification from exempt

to nonexempt as a loss of status or a demotion • Employees reclassified as nonexempt often believe

they have less promotional opportunities • Employees reclassified to nonexempt status may no

longer be entitled to certain benefits, such as health insurance or the same PTO allotments

• Employees reclassified as nonexempt probably will have less flexibility and more work restrictions


DEPARTMENT OF LABOR’S NEW GUIDANCE REGARDING

MISCLASSIFICATION OF EMPLOYEES AS INDEPENDENT CONTRACTORS


DOL Issues New Guidance That Defines Independent Contractor • Use of independent contractors is on the rise; one reason is

to avoid the Affordable Care Act • DOL issued Administrator’s Interpretation on July 15, 2015

regarding identification of employees who are misclassified as independent contractors

• It narrows the classification of independent contractors • It states that most workers in the U.S. are employees, not

independent contractors, and are covered under the FLSA • Enforcement in this area will increase • Why is this important; impact on state and federal budgets

through lower Social Security, Medicare and unemployment fund contributions, this is a strong message by the DOL


DOL: Economic Realities Test • Administrator’s Interpretation adopts the “economic realities” test • Economic realities test is a multifactorial test that focuses on

whether the worker is economically dependent on the employer or in business for him or herself

• “All of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee.”

• “The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.”

• There are no bright-line rules upon which an employer can rely; the same individual could be an independent contractor or an employee depending upon the employer at issue


Factors of Economic Realties Test • Is the work an integral part of the employer’s business? • Does the worker’s opportunity for profit or loss depend

on his/her managerial skill? • What is the extent of the relative investments of the

employer compared to the worker? • Does the work performed require special skill and

initiative? • Is the relationship between the employer and the

worker permanent or indefinite? • What is the nature and degree of the employer’s

control?


Suggestions and Key Takeaways • Audit current independent contractor relationships; are they really

employees; look for high risk situations • Maintain records on the independent contractor determination

process (business licenses, business cards, contractor tax records, project plans, correspondence, and other supporting records)

• Carefully review the nature of work to be performed before engaging the services of any non-employee; who will truly exercise control; evaluate worker independence

• Remember that entering into an independent contractor agreement or hiring a business entity does not necessarily protect you from liability; pay a LLC rather than an individual

• When entering into agreements with service providers, obtain the appropriate indemnification provisions

• Use independent contractors sparingly


What’s new at the EEOC for 2016 & why you should care

Joe Bontke

713 651 4994 office [email protected]

We’ve Been BusyEEOC Select Taskforce on the Study of Harassment in the WorkplaceBacklash against employees who are Muslim or are perceived to be MuslimGender stereotyping/Gender identify/Sexual orientationArrest and conviction recordsPregnancy discrimination

Young v. UPSADA and pregnancy

Caregiver discriminationNew Technology

Employer portalStrategic plan (Farm worker outreach)

January 14, 2015: The Commission met to discuss why WORKPLACE HARASSMENTis still a major problem – 30% of all charges

receivedby EEOC – and how to address it.

EEOC Select Task Force on the Study of Harassment in the Workplace


Led by Commissioners Chai Feldblum and Victoria LipnicPurpose is to study the pervasive issue of harassment in the workplace and suggest tools employers can use for addressing it.Some observations:

Prevention starts at the top – Organizational CultureIf the issue is important to the boss, it will be important to everyone elseStudies show organizational conditions, rather than characteristics of individuals, are biggest indicators of the prevalence of harassment in the workplace (organizational tolerance)

TrainingMandatory and periodic


Some observations:Establish strong policy

What violates the policyWhat are consequencesWho is responsible (management)Don’t forget social media

Establish well defined complaint proceduresKeep the complaining employee in the loopRespond promptly/fairlyReport to all parties

Do not retaliateTrain investigators (often overlooked)Remember, everyone is watching


Is it important to you?If so, creating and maintaining a culture of respect is a matter of common sense

http://www.eeoc.gov/eeoc/task_force/harassment/index.cfmhttp://www.eeoc.gov/eeoc/task_force/harassment/index.cfm

March 6, 2014: EEOC issues technical assistance publications on RELIGIOUS GARB & GROOMING in the workplace.

What Is a “Garb and Grooming” Practice?Wearing religious clothing or articles

e.g., a Muslim hijab (headscarf), a Sikh turban, or a Christian cross

Observing a religious prohibition against wearing certain garments

• e.g., a Muslim, Pentecostal Christian, or Orthodox Jewish woman's practice of not wearing pants or short skirts

Adhering to shaving or hair length observances • e.g., Sikh uncut hair and beard, Rastafarian dreadlocks,

or Jewish peyes (sidelocks)

Backlash DiscriminationFrom 9/11/01 to 9/30/15

EEOC took 9679 charges alleging discrimination Religion –MuslimNearly 4X’s the number of Religion – Muslim charges filed 11 years prior to 9/11

From 9/11/01 to 9/30/15EEOC took 1054 charges alleging backlash discrimination –MuslimApproximately 24% have been closed as “merit resolutions” (finding of discrimination, settlement, withdrawal with benefits)

Texas has 2nd highest number of backlash charges (142)

Religion DiscriminationWhen religion issues go bad in the workplace, they can go very bad, very quicklyBe proactiveEstablish a culture where all beliefs are respected

Our beliefs define us They usually cannot be negotiated or reasoned awayTitle VII balances the individual’s right to free exercise of her or his religious beliefs and the employer’s right to run its organization as it chooses.

Shows up in:ExpressionHarassmentDiscriminationReasonable accommodations

Respond to issues or complaints quickly and fairly

Gender Stereotyping Gender IdentitySexual Orientation

The decision is pretty unambiguous.See page 6, 1st paragraph,

"We conclude that sexual orientation is inherently a sex-based consideration, and an allegation of discrimination based on sexual orientation is necessarily an allegation of sex discrimination under Title VII."

Gender Stereotyping

In Price Waterhouse v Hopkins, 490 U.S. 228 (1989), the Supreme Court found that acting within the context of sex stereotyping is acting on the basis of gender.

Ann Hopkins was denied a partnership at the accounting firm; comments made by decision makers were that she was “macho,” should “take a course in charm school,” and should “walk more femininely, talk more femininely, dress more femininely, wear make-up, have her hair styled, and wear jewelry.”

Gender Stereotyping & Gender Identity“When an employer discriminates against someone because the person is transgender, the employer has engaged in disparate treatment related to the sex of the victim….This is true regardless of whether an employer discriminates against an employee because the individual has expressed his or her gender in a non-stereotypical fashion, because theemployer is uncomfortable with the fact that the person has transitioned or is in the process of transitioning from one gender to another, or because the employer simply does not like that the person is identifying as a transgender person. In each of these circumstances, the employer is making a gender-based evaluation, thus violating [Price Waterhouse’s] admonition that an employer may not take gender into account in making an employment decision.’” Macy v Dept of Justice (April 20, 2012)

Arrest & Conviction Records

Background ChecksWhy is the Commission interested in this?

Using blanket policies to exclude applicants for employment based on conviction records, arrest records and credit checks may adversely impact certain protected groupsReports contain errors

Disparate TreatmentDon’t deviate from the policy because an applicant is in a certain protected group

Adverse Impact:Griggs v Duke Power Company (1971)Neutral policyAdverse impactJob related and consistent with business necessity

Background ChecksTwo circumstances employers will meet “job relatedness and consistent with business necessity”

The employer validates the criminal conduct screen for the position in question per the Uniform Guidelines on Employee Selection Procedures (Uniform Guidelines) standards (if data about criminal conduct as related to subsequent work performance is available and such validation is possible);The employer develops a targeted screen considering at least the nature of the crime, the time elapsed, and the nature of the job (the three Green factors), and then provides an opportunity for an individualized assessment for people excluded by the screen to determine whether the policy as applied is job related and consistent with business necessity.

Background ChecksMust show job relatedness and business necessity (Green v Missouri Pacific Railroad)

The nature and gravity of the offense or conduct;The time that has passed since the offense or conduct and/or completion of the sentence; and The nature of the job held or sought.

Some level of risk is inevitable in all hiring. It’s ultimately about risk managementMust accurately distinguish between those applicants who pose an unacceptable risk and those who do not (be careful of blanket exclusions)

Background ChecksArrests

An arrest does not establish that criminal conduct has occurredFinal dispositions are often not reportedAn arrest should not be the reason for the employment decision, but the underlying conduct may be a reason, if objectively known

Background Checks (best practices)Eliminate policies or practices that exclude people from employment based on any criminal record.Train managers, hiring officials, and decision makers about Title VII and its prohibition on employment discrimination.Develop a Policy

Identify essential job requirements and the actual circumstances under which the jobs are performed. Determine the specific offenses that may demonstrate unfitness for performing such jobs. Identify the criminal offenses based on all available evidence. Determine the duration of exclusions for criminal conduct based on all available evidence. Include an individualized assessment. Record the justification for the policy and procedures.Note and keep a record of consultations and research considered in crafting the policy and procedures. Train managers, hiring officials, and decision makers on how to implement the policy and procedures consistent with Title VII.

Background Checks (best practices)Questions about Criminal Records

When asking questions about criminal records, limit inquiries to records for which exclusion would be job related for the position in question and consistent with business necessity.

ConfidentialityKeep information about applicants’ and employees’ criminal records confidential. Only use it for the purpose for which it was intended.

• Georgia (2015) • Delaware (2014) • Nebraska (2014) • Illinois (2014) • New Jersey (2014) • California (2013) • Maryland (2013) • Minnesota (2013) • Rhode Island (2013) • Colorado (2012) • Connecticut (2010) • Massachusetts (2010) • New Mexico (2010) • Hawaii (1998)

July 14, 2014: EEOC issues updated enforcement guidance on PREGNANCY DISCRIMINATION.

Pregnancy

The Pregnancy Discrimination Act (PDA)

First clause:

“The terms ‘because of sex’ or ‘on the basis of sex’ include, but are not limited to, because of or on the basis of pregnancy, childbirth, or related medical conditions”; and

42 U.S.C. § 2000e (k) (emphasis added).

PDA: “Related Medical Conditions”Examples of “related medical conditions”:

Complications requiring bed restGestational diabetesAfter-effects of C-sectionLactation – EEOC v. Houston Funding, 2013 WL 2360114 (5th Cir. 2013)

The PDA’s Second Clause“[W]omen affected by pregnancy, childbirth, or related medical conditions shall be treated the same for all employment-related purposes, including receipt of benefits under fringe benefit programs, as other persons not so affected but similar in their ability or inability to work, and nothing in section 703(h) of this title shall be interpreted to permit otherwise. . . .”

Examples of such benefits: “light duty,” leave, health insurance

Young v UPSThe case involved a benefits policy.Young was a part time driver and became pregnantShe requested a light duty assignmentUPS denied her request based on policy that light duty assignments were given to employees who 1) were unable to perform their jobs due to on the job injuries, 2) had a disability covered under the ADA, or 3) had lost DOT certification because of a failed medical exam, a lost driver’s license, or involvement in a motor vehicle accident.

Young v UPSBurden Shifting:

An employer may articulate a non-discriminatory reason for the difference in treatmentA plaintiff may show that the articulated reason is pretextual if:

I. The employer’s policy significantly burdens pregnant employees

II. And the reasons for the policy are not sufficiently strong to justify the burden

III. But rather, when considered along with the burden imposed – gives rise to an inference of intentional discrimination.

PDA: LeavePregnancy-Related Medical Leave

No forced leaveNo increased restrictions on pregnancy-related medical leave

Orr v. City of Albuquerque, 531 F.3d 1210 (10th Cir. 2008) (requiring pregnant workers to use only sick leave for maternity leave while allowing other workers to use vacation or comp time may be a PDA violation

Parental LeaveMust be provided to mothers and fathers on the same terms.

Pregnancy & the ADAAAEEOC regulations still make a distinction between “normal” pregnancies and those with complications.See EEOC’s Questions and Answers on the Final Rule Implementing the Amended ADA, at Question 23, available at http://www.eeoc.gov/laws/regulations/ada_qa_final_rule.cfm

Generally, under the ADAAA’s expanded rules of construction and definitions, many more pregnancy-related conditions now may qualify as “physical impairments” supporting “actual disability” and “record of such disability” claims.

For example, someone with an impairment resulting in a 20-pound lifting restriction that lasts or is expected to last for several months is substantially limited in the major life activity of lifting.

ADA: Pregnancy-Related Impairments that May Be Substantially Limiting

Pelvic inflammation – may substantially limit walkingPregnancy-related carpal tunnel – may substantially limit liftingDisorders of uterus or cervix – may substantially limit reproductive functionPregnancy-related sciatica – may substantially limit musculoskeletal functionGestational diabetes – may substantially limit endocrine functionPreeclampsia – may substantially limit cardiovascular or circulatory functions

More Pregnant Women in the Workforce

• 1961-65: 35% of first-time mothers who worked during pregnancy worked into their final month.

• Compare to 2006-08: 82% of first-time mothers who worked during pregnancy worked into their final month.

1970: Mean age at first birth was 21.4.

Compare to 2013: Mean age at first birth was 26.

2012: 41 % of all births were to single women.

CaregiverDiscrimination

Caregiver DiscriminationCaregivers care for children, the elderly or people with disabilitiesWomen comprise approximately 50% of the U.S. workforce, and women with small children are twice as likely to be employed as they were thirty years agoWomen are denied hire or denied promotions because employers assume a woman with care giving responsibilities will not be reliable on the job

The assumption is: with women, it’s family first and career second, and with men, it’s career first and family second

Women have the legal right to be J. Paul Getty

Caregiver Discrimination (Motherhood Penalty)

• Motherhood penalty - when controlling for qualifications, childless women and fathers are generally rated significantly higher than mothers on competency, work commitment, promotability, and hiring recommendations.

• Mothers seen as less reliable and competent than men or women without children – 5% pay gap/child

• Childless women earn 94 cents to a dollar for a childless man, while mothers earn about 60 cents of a father’s dollar.

• Mothers work less and may accept lower wages for more family friendly jobs may explain part of the “motherhood penalty.”

• Fatherhood Bonus – when controlling for a number of labor market factors, men of all racial/ethnic groups were compensated more than childless men by about $4,000 to $5,000

New Technology

Digital Charge SystemOffice e-mail addresses

Dallas: [email protected] Antonio: [email protected]: El Paso

Direct Video Access for ASL SpeakersDirect access to an EEOC employee who can answer the caller’s questions over a videophone844-234-5122

Strategic PlanInventory controlSystemic investigations

Hiring, hiring, hiringHarassment and RetaliationHuman TraffickingPartnerships

Underserved populationsSmall businesses

Streamline technologyOn-line charge filingUse of social media

Strategic Enforcement Plan

Adopted by the Commission on 12/17/13Targeted Enforcement

“broad and significant impact to prevent and remedy discriminatory practices in the workplace.”

Integrated approachBetween offices and staff and other agencies including DOL and OFCCP

Increased top down leadership by the Commission“Identified priorities”

“necessitates a paradigm shift to focus on specific priorities

Strategic Enforcement Plan1) Eliminating barriers in recruitment and

hiring - Racial, ethnic, and religious groups, older workers and people with disabilities. Exclusion policies, steering, screening tools (e.g. background checks, pre-employment tests, etc.).

2) Protecting immigrant, migrant and other vulnerable workers - Those groups of individuals who are frequently unaware of their rights.

3) Addressing emerging and developing issues - ADA issues (reasonable accommodation, qualification standards, undue hardship), intersection of ADA and pregnancy, gender stereotyping.

Intersectional Discrimination

Immigrant status – foreigner, guest worker, undocumented worker, etc.National origin, religion, race, age, etc.Socio-economic status – poverty, limited education, etc.Traditional attitudes concerning women in society in general and in work Limited English proficient – Almost half (46%) of all foreign-born workers in the U.S. are LEP. (Nearly 73% of LEP workers speak Spanish.)Domestic violence at home

Immigrant women face gender-based discrimination and other forms of “otherness” which can further disadvantage or make them vulnerable:

Population in the Fields

Every year an estimated 500,000 women work in U.S. fields.

Sexual Harassment & Farmworker Women

A study done for California State University found that more than 90% of farmworker women reported sexual harassment on the job as a major problem.

Domestic violence connection?

A 1995 survey of farmworker women conducted by the Migrant Clinicians Network found that 1 in 3 had experienced domestic violence in the last year.

Strategic Enforcement Plan4) Enforcing equal pay laws – Focus on gender,

may use directed investigations and Commissioner charges to facilitate enforcement.

5) Preserving access to the legal system –Address retaliatory actions, overly broad waivers, and settlement provisions restricting access to Commission.

6) Preventing harassment through systemic enforcement and targeted outreach – Focus on sexual harassment and harassment related to race, ethnicity, religion and age.

any questions, comments, concerns or complaints

Joe BontkeEEOCOutreach Manager and Ombudsman713 651 4994 office713 907 2855 [email protected]

The Tri-State Case

The Tri-State Case: Is a Federated Cooperative Liable for Its Members’ Actions?

PRESENTER BIOGRAPHIES

Ty Thompson Vice President & Deputy General Counsel for Director and Member Legal Services NRECA

Ty Thompson is chief member counsel for the National Rural Electric Cooperative Association in Arlington, Virginia. A native of Raleigh, North Carolina, Ty graduated magna cum laude in Industrial Engineering from North Carolina State University in 1987. After working approximately two years as an inside sales engineer in Charlotte, N.C., Ty attended the University of North Carolina School of Law in Chapel Hill and graduated in 1992.

After working briefly for a personal injury law firm in Durham, N.C., Ty practiced law four and one-half years at Crisp, Page, and Currin in Raleigh. While there, Ty worked extensively with electric cooperatives. In July 1997, Ty began working for NRECA. At NRECA, Ty works primarily with electric cooperative tax, corporate governance, and operational legal issues. In addition, Ty is an Editor for NRECA’s monthly Legal Reporting Service; presents at NRECA’s annual Legal Seminar; assists with NRECA Course 925.1, “Cooperative Bylaws: Guiding Principles and Current Issues;” researches and drafts sample electric cooperative documents like NRECA’s Bylaw Revision Guide; speaks at various conferences, seminars, and meetings regarding electric cooperative legal issues; counsels NRECA regarding corporate governance legal issues; and serves as Parliamentarian for the NRECA Board of Directors.

Jay Sturhahn Member Sherman & Howard

Jay Sturhahn is a member in Sherman & Howard’s Litigation Department. Jay represents business and individual policy-holders in disputes with their insurers, including general liability, directors and officers liability, property, builders’ risk, fidelity and surety, employer’s liability, errors and omissions, environmental, commercial auto, health, life, disability, excess/umbrella, crime, cyber risk, reinsurance and captive insurance programs. He also represents clients in general business disputes and litigation, including one of the West’s largest electricity generation and transmission cooperatives. He has represented clients across a variety of industries, including construction, energy, finance, health care, government contracting and others through the United States and internationally. Jay also represents businesses in the construction industry, assisting in claim preparation and defense on matters involving bidding, delays, defective construction or design, differing site conditions, and interference. Jay is a regular author and speaker on insurance coverage and risk avoidance issues impacting business and individuals and was recognized by Colorado Super Lawyers as a “Rising Star” in the areas of Insurance Coverage, Business Litigation and Construction Litigation.

Are a G&T and its Members a Joint Venture?

Ty Thompson, NRECA 703-907-5855, [email protected]

Jay Sturhahn, Sherman and Howard 303-297-2900, [email protected]

mailto:[email protected]

mailto:[email protected]

Joint Venture

• General Law – 46 Am. Jur. 2d Joint Ventures (2015) – 48A C.J.S. Joint Ventures (2015) – Black’s Law Dictionary (10th ed. 2014)

• General Definition – Association of Two or More Persons to Carry on a

Single Business Venture for Profit – Combine Property, Money, Effects, Skill, and

Knowledge

February 11, 2016 2

Joint Venture

• General Tort Liability – Members are Jointly and Severally Liable to Third

Parties for Torts Committed in Conducting Venture – Negligence of One Member Imputed to Other

Members – Members are Vicariously Liable for One Another’s

Negligence

February 11, 2016 3

Joint Venture

• General Elements – Express or Implied Agreement to Associate – Common Purpose in Associating – Joint Interest in and Contribution to Venture – Joint Right of Control or Management of Venture – Joint Right to Share Profits and Duty to Share

Losses of Venture

February 11, 2016 4

Las Conchas Fire Litigation

• Las Conchas Fire (June 2011) – Santa Fe National Forest (New Mexico) – More than 150,000 Acres Burned – No Deaths – Smog, Soot, Property, Etc. Damage

• Danger Tree Located Outside Easement Struck Electric Distribution Line

• Property Insurers, Property Owners, and Pueblos Sued (January 2014 – First Amended Complaint) – Jemez Mountains Electric Cooperative (“JMEC”) – Tri-State Generation and Transmission Association (“TS”)

February 11, 2016 5

Las Conchas Fire Litigation

• Many Allegations, Including JMEC and TS are Joint Venture or Single Enterprise – TS Vicariously Liable for JMEC

• TS Controls JMEC – TS Bylaws and Policies

• Wholesale Power Contract • TS and JMEC Share Profits (Capital Credits)

February 11, 2016 6

Shoshone River Power, Inc.

• Tri-State Generation and Transmission Association v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989) – United States Court of Appeals for the Tenth Circuit – Wholesale Power Contract Case

• “Shoshone’s participation in the Tri-State cooperative system and its interrelationship with Tri-State and the other members of the Tri-State system make the parties’ contractual relationship a unique one.”

February 11, 2016 7

Shoshone River Power, Inc.

• “The all-requirements contracts which form the Tri-State system are not simple requirements contracts but rather interdependent, joint and mutual contracts with a common purpose of securing the REA loans and thereby effectuating the REA policy to provide the economic means for supplying electricity to rural areas.”

• “The contracts also allow the entire system to be viewed as a whole, combining the members’ financial strength and increasing their ability to obtain funds, through Tri-State, to build facilities and obtain power in an attempt to meet the members’ actual and projected power needs.”

February 11, 2016 8

Associated Electric Cooperative

• City of Mt. Pleasant v. Associated Electric Cooperative, 838 F.2d 268 (8th Cir. 1988) – United States Court of Appeals for the Eighth Circuit – Federal Antitrust Case

• “The record bears out defendants’ claim that the cooperative organization is a single enterprise pursuing a common goal -- the provision of low-cost electricity to its rural consumer-members.”

February 11, 2016 9

Associated Electric Cooperative

• “We agree with the City that these interests were ‘diverse,’ but not in the sense necessary to create a fact issue on whether these companies are part of a single enterprise.”

• “They are interdependent, not independent. The disagreements we have described are more like those among the board members of a single enterprise, than those among enterprises which are themselves separate and independent.”

February 11, 2016 10

Oglethorpe Power Corporation

• Davenport v. Oglethorpe Power Corporation, 396 S.E.2d 580 (Ga. Ct. App. 1990) – Court of Appeals of Georgia

• Plaintiff Injured after Contacting Electric Line – Plaintiff Sued Rayle Electric Membership Corporation (“EMC”)

and Oglethorpe Power Corporation (“OPC”) – Plaintiff Alleged EMC and OPC were Joint Venture

• Affidavits – Line was Owned, Maintained, and Operated by EMC, and not

by OPC – OPC had No Control over EMC regarding Line

• Summary Judgment for OPC – Plaintiff Appealed



• “The primary issue on appeal is whether defendants [OPC and EMC] were joint venturers.”

• No Combination of Property or Labor in Joint Undertaking – Test is Not OPC’s Internal Structure – Test is Not EMC’s Equity Interest in OPC – “The germane fact in this regard is that the electric

power line at issue along with the remainder of the distribution system was owned, operated, and maintained solely by [EMC].”



• “Furthermore, [OPC and EMC] are not joint venturers simply because their businesses are interdependent.” – EMC Relies on OPC to Generate and Transmit Wholesale Electric Power – OPC Relies on EMC to Distribute Retail Electric Power – “However, such interdependence is universally found in a wholesaler-retailer

relationship and is not inconsistent with the operation of separate businesses.”

• Greensboro Lumber Co. v. Ga. Power Co., 643 F. Supp. 1345, 1367 (N.D. Ga. 1986) (OPC and its Members are a Single Integrated Entity for Federal Antitrust Purposes) – “not instructive in relation to the joint venture issue” – [See also Greensboro Lumber Co. v. Ga. Power Co., 844 F.2d 1538, 1541-42

(11th Cir. 1988) (“We question whether this ‘single entity theory’ is applicable to [OPC] and the EMCs. … However, we need not reach that question …”).

• Judgment Affirmed


Western Farmers Electric Cooperative

• Jenks v. Hill, 504 F. Supp. 1130 (W.D. Okla. 1981) – United States District Court for the Western District of

Oklahoma • Plaintiff Injured after Contacting Electric Line

while Transporting Farm Implement – Plaintiff Sued Harmon Electric Association

(“Association”) and Western Farmers Electric Cooperative (“Western”)

– Plaintiff Alleged Western Knew or Should have Known Line did Not Meet National Electric Code



• “…, this Court is satisfied that the proper rule to be applied is that a generating company is not ordinarily liable for the negligence of a customer-distribution company when that distribution company exercises exclusive control over its distribution system.” – Association “exercised exclusive control” over Line – Western Not Liable “in the absence of some exceptional

circumstances” • Exceptional Circumstances

– Generator Constructed or Maintained Line – Generator Continued Furnishing Electric Energy after

Actual Knowledge of Defect



• “…, this Court holds that a generating company [like Western] cannot be held liable for the negligence of a distributing company [like Association] when the distribution company exercises exclusive control over the distribution system unless the generating company continues to supply the current after having actual knowledge of some negligence in the maintenance of the distribution system.” – Deposition Testimony Indicated Western Lacked Actual

Knowledge of any Negligence or Defect • Summary Judgment for Western


Louisiana Sugar Cane Products

• Haywood v. Louisiana Sugar Cane Products, 692 So. 2d 524 (La. Ct. App. 1997) – Court of Appeal of Louisiana

• Louisiana Sugar Cane Products, Inc. (“Cooperative”) – Markets Raw Sugar and Molasses – Five Sugar Mill Cooperatives were Members (“Members”)

• Plaintiff Injured in Fall from Molasses Storage Tank Owned by Cooperative – Plaintiff Sued Cooperative and Members – Plaintiff Alleged Cooperative and Members were “Single

Business Enterprise” February 11, 2016 17

Louisiana Sugar Cane Products

• Summary Judgment for Members – Plaintiff Appealed

• Legislature Authorized Incorporation of Associations Like Cooperative to Market Products of Members – Inconsistent to Hold that “the same actions authorized by the

Co-operative Marketing Law justify piercing the corporate veil in order to hold the member co-operatives individually liable”

– Plaintiff’s Argument “that the relationship between [Cooperative and Members] justifies piercing the corporate veil [is] without merit.”

• No “Alter Ego” Grounds to Pierce Corporate Veil • Judgment Affirmed


Amicus Curiae

• Amicus Curiae – NRECA – CFC – CoBank – National Council of Farmer Cooperatives – Growmark (Regional Agricultural Cooperative)

• Focused on Joint Venture Allegation • 2014 Summary Judgment Hearing

– Any Appeal February 11, 2016 19

Amicus Curiae

• September 2014 Written Brief – Introduction to Cooperatives – Cooperative Principles – Cooperatives’ Role in Economy, Particularly Rural

Electrification – No Evidence or Law Supporting Joint Venture – Joint Venture Finding would Harm Cooperative

Model • October 2014 Oral Argument (Little Time)


United States Department of Agriculture

• February 5, 2013 Bill – United States Department of Agriculture Forest

Service Bills JMEC $38,000,000 for Fire Suppression Costs

• December 23, 2014 Letter – United States Attorney, District of New Mexico,

Writes JMEC and TS Attorneys – United States Departments of Agriculture and the

Interior Referred Matter for “appropriate legal action”



• December 23, 2014 Letter (continued) – Forest Service, Bureau of Land Management, and

National Park Service Property Damaged – JMEC, TS, and JMEC-TS “Joint Venture” are Liable – “We believe that [TS] and JMEC are a joint venture or

single enterprise selling and delivering electricity to consumers, …”

• May 5, 2015 Meeting – NRECA and JMEC Meet with Rural Utilities Service – Other Communications between JMEC and RUS



• May 26, 2015 Letter – NRECA Chief Executive Officer Writes Secretary of Agriculture – “The USDA position is concerning.” – Bill Jeopardizes JMEC Ability to Repay RUS – Joint Venture Assertion is Contrary to Law and Threatens RUS

Loan Security – Federal Government has Never Asserted Joint Venture

• September 15, 2015 Letter – Secretary of Agriculture Writes NRECA CEO – “As this is a matter of active litigation, at this time I can offer

limited comment on the substance of the case.” – (USDA is Not Involved in Litigation) – (Earlier Letter Supported Plaintiffs’ Joint Venture Position)


Gross Receipts Tax Exemption

The Making of a Gross Receipts Tax Exemption

PRESENTER BIOGRAPHIES Sharon Appelt Tax Director Darigold Sharon Appelt is Tax Director for Northwest Dairy Association and its marketing subsidiary Darigold, Inc. headquartered in Seattle. Sharon has worked 20 years with cooperative tax issues. Before joining Darigold, Sharon worked with PriceWaterhouse Coopers and the Boeing Company. Sharon is a member of the NSAC Tax Committee and Tax Executive Institute. Her education background includes a B. B. A. degree with a concentration in Marketing and a M. S. degree in Accountancy from the University of Houston, and a M. S. degree in Taxation from Golden Gate University. Sharon is a Certified Public Accountant in Washington State. Dan Coyne Director of Government Affairs Northwest Dairy Association/Darigold Dan Coyne serves Northwest Dairy Association/Darigold as director of government affairs. Dan has worked for the cooperative since 1994, primarily focusing on lobbying state legislatures and Congressional offices within the company’s operating territory in the Pacific Northwest. Dan began lobbying in Washington State in 1981 and, in addition to NDA/Darigold, represents a few select business clients before the Washington State Legislature.

The making of a Gross Receipts tax exemption

NCFC LTA Conference

February 11, 2016

Presented by Sharon Appelt & Dan Coyne

Year was 2000

• Washington State gross receipts tax - known as Business & Occupation (B&O) Tax

• The B&O tax is highly regressive • The rates vary by activity:

• Example

• A manufacturing company with annual sales of $1,000,000,000 pays $4,840,000.

Activity B&O Rate

Manufacturing 0.484%

Wholesaling 0.484%

Retailing 0.471%

Year was 2001 • Evolution of B&O rates created inequity among

food processors

• Darigold proceeded to change the tax rate • Political Environment: Both the House and Senate were

Democrat-controlled

Manufacturing Activity (sold out of state) B&O Rate Processing apples, potatoes, cherries, grapes, pears, onions, etc.

0.138%

Processing wheat barley 0.138%

Processing soybeans, canola 0.138% Processing perishable meat products 0.138% Processing, drying, condensing, bottling of milk

0.484%

Process of getting the B&O Dairy Rate Changed • Darigold developed its own campaign

• Capitalized on the cooperative’s goodwill

• Educated State Legislators & Governor • Economic impact

• Competiveness

• Differing tax regimes

• Underscored fairness among food processors

• Dual bills – House & Senate

Success !!!

• 2001 achieved dairy manufacturing preferential rate 0.138%

• Dairy products sold out of state

• Immediately cut expense by $2 million per year

Fast forward - Year was 2005

• The fruit and vegetable processors obtained an exemption from manufacturing B&O tax

• What just happened?

Manufacturing Activity (sold out of state) B&O Rate Processing apples, potatoes, cherries, grapes, pears, onions, etc.

0.00%



0.138%

Year was 2006 - Back to Olympia

• Darigold developed its own campaign for same exemption

• Leveled playing field for Washington food processors • Encouraged investments • Supported rural and farm jobs • Dual bills – House & Senate

• Political Environment: House and Senate – Democrat controlled

Success !!!

Manufacturing Activity (sold out of state) B&O Rate Processing apples, potatoes, cherries, grapes, pears, onions, seafood

0.00%



0.00%

• Expanded exemption to out-of-state sales for • Dairy and seafood processing

• B&O tax rate (0.484%) still applies to products

manufactured and sold within Washington • Sunsets July 2012

Year was 2012 – the 1st sunset

• Political Environment • Liberal factions in the House Democratic Caucus took

aim at all business tax preferences • Northwest Food Processors Association (NWFPA) led a

coalition • Commissioned a high level economic study • Dual bills – House & Senate

• Following two special sessions on budget • B&O tax exemption extended for 3 years to 2015

Year was 2015 – the next sunset

• Started the education process a year in advance • Entire Washington Ag Community funded a

comprehensive Ag Economic Study • More than 20 farm, commodity & trade associations, and

individual companies joined forces

• Political environment – • Republican controlled Senate wanted the exemption • Democratic controlled House split on the exemption • State faced a $2 billion shortfall • Taxpayers calling for more disclosure on corporate

incentives

• In the eleventh hour exemption extended 10 years

expiring in 2025!!!!

• Exemption is now called a “deduction” subject to public disclosure

2015 Extension of exemption

Takeaways

• Working together created more influence • Focus on education • Sponsor bills in both Senate & House • Cooperatives including members must be involved • Cooperatives need representation • DON’T GIVE UP!!!

Questions?

Capper-Volstead

Capper-Volstead and Activist Consumers: How to Operate Under the Immunity

PRESENTER BIOGRAPHY

Christopher Ondeck Partner Proskauer Rose LLP Chris Ondeck is a partner in the Litigation Department and co-chair of the Antitrust Group. He focuses his practice on representing clients in civil and criminal antitrust litigation, defending mergers and acquisitions before the U.S. antitrust agencies, defending companies involved in government investigations, and providing antitrust counseling. Chris has handled antitrust matters for clients in a number of industries, including advertising, aerospace, alcoholic beverages, appliances, building materials, defense, medical devices, metals, mining, natural resources, oil and gas, packaging, pharmaceuticals, software, and telecommunications. He also has developed substantial experience advising clients regarding the application of the antitrust laws to the pharmaceutical industry, the agriculture industry, trade associations, and the energy industry. Chris has particular experience with the antitrust issues involved with agricultural cooperatives. For 18 years he has defended the use and application of the Capper-Volstead Act's antitrust exemption for agricultural cooperatives, their members, and their agents in court cases, arbitrations and government investigations, and he has published extensively on the topic. He currently represents clients in the nationwide antitrust class action litigations in the egg, potato, and mushroom industries. He also advises cooperatives on structuring and incorporation, governance, pooling issues, agency agreements, surcharges, labor issues, use of agents, and animal welfare practices. Chambers USA, which ranks Chris as a leading antitrust lawyer, called him a "rising star," noting that clients describe him as "our primary thought partner - he's very good at explaining the complex issues and making them easy to understand" and praise him for "his strong advocacy skills." He was also recognized by Law360 as one of the ten "rising stars" in antitrust law in 2010. Chris is a frequent speaker on antitrust topics, and is the author of the Supply Control White Paper, published in 2009 by the National Council of Farmer Cooperatives. Chris moderated the 2012 Capper-Volstead Conference, and serves by appointment as the vice-chair of the Capper-Volstead Sub-Committee of the National Council of Farmer Cooperatives. Prior to joining Proskauer, Chris was a former vice-chair of Crowell & Moring’s Antitrust Group and co-chair of its Trade Association Group.

Capper-Volstead and Activist Consumers: How to Operate Under the Immunity

Chris OndeckFebruary 11, 2016

NCFC Legal, Tax and Accounting Conference

February 10-12, 2016

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Contents

• Activists and new demands on cooperatives

• What does Capper-Volstead cover in this space?

• Real world examples and legal issues

• Lessons-learned and practical advice

• Capper Checklist

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Activist Consumers and New Demands on Cooperatives

• The meaning of “activist”

• Requests by different groups and constituencies that a product be produced in what they view as a socially responsible manner

• The ‘socially responsible’ criteria usually relate to the manner of production, not a change in the product itself

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Examples of Attributes Sought By Activists

• Animal welfare

• Fair wage/fair labor practices

• Sweatshop free

• No child labor

• Fair trade

• Organic/natural

• Non-GMO

• Others (dolphin safe, hormone free, locally produced)

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Activist Consumers Are Here to Stay and Are Finding Means to Have Significant Impact

• “Voters overwhelmingly approved Proposition 2 in 2008 to effectively abolish the close confinement of farm animals in cramped cages and crates — a practice that animal advocates say causes needless suffering and boosts the likelihood of salmonella contamination.” -12/28/14 LA Times Article “Egg prices likely to rise amid laws mandating cage-free henhouses”

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• “In 2005, Taco Bell became the first big buyer to sign on to CIW's Fair Food Program. Buyers agree to pay an extra penny per pound for tomatoes -- money that goes to workers. And buyers only do business with participating Florida farmers. More than a dozen restaurant chains and retailers have signed on, including McDonalds, Chipotle, Trader Joes, and last year Wal-Mart, which sells 20 percent of America's tomatoes.” – 8/9/15 CBS News Article “The growing demand for ‘fair food’”

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• “McDonald’s, the world’s largest fast food chain and one of the biggest egg buyers anywhere, announced it would ditch its conventionally farmed eggs and sell nothing but cage-free eggs in all of its US and Canadian restaurants. By the end of the year, just about every major fast food chain and a handful of multinational food companies had followed suit, including Subway, Starbucks, Nestle and most recently Wendy’s, which joined in just this month.” - 1/25/16 Wired Article “The Insanely Complicated Logistics of Cage-Free Eggs For All”

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Costs

• The imposition of new attribute requirements often imposes additional costs:- Increased cost of production- New input costs- Costs to renovate existing facilities or implement new practices

or policies- Wage and labor costs- Efficiency costs- Monitoring, auditing, certifying costs- Unanticipated costs (legal, regulatory, etc.)

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Dealing with the Costs

• How are these costs addressed?

• How can producers and coops be fairly recompensed for new costs?

• Who negotiates this? And negotiate with whom?

• Is there a minefield for coops, and is there a safe(r) path?

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Role of a Cooperative

• A cooperative frequently provides the most effective means of addressing social responsibility issues that affect all producers because they are being driven by large retail consumers or collective activist groups on behalf of end-consumers

• Expertise and resources at the coop level

• Ability to communicate, investigate, respond using a single voice

• Ability to develop standards

• Ability to negotiate (in certain specific ways – more on this later)

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Is Capper-Volstead Relevant?

• Capper provides the following protectionsPermissible to:

- Discuss current and future price, market conditions;- Set prices jointly;- Common branding;- Everything else encompassed by Capper-Volstead

(engage in joint processing, preparing for market, handling and marketing).

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Capper Requirements

• Protection under Capper requires the following:-All Members Are Producers-Voting/Dividend Alternative-Mutual Benefit-50% Rule-No agreements requiring immunity with non-covered

entities-No Predatory Conduct

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Negotiating with Customers is at the Core of Capper

• A fundamental purpose for the Capper-Volstead Act is to enable producers and their coops to negotiate with customers, regarding prices and other terms and conditions of the sale of their products

• Costs = part of the price of producing the products

• Capper covers negotiating with customers over additional costs; stated another way, negotiating for the price to be paid (caveat – assuming all requirements for Capper are met)

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Negotiating with Constituencies Other than the Customers

• What about negotiating with a group advocating on behalf of agricultural workers?

• With an animal rights organization?

• With other groups representing specific activist interests?

• Does Capper protect these negotiations?

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Internal Decision-Making Within A Cooperative

• Some people assume in good faith that all internal discussions and decisions within a coop about how to respond to activist requests, particularly those that impose additional costs, are protected by Capper.

• Is this correct?

• How has this been challenged?

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Challenges• In re Processed Egg Products, No. 08-md-2002 (E.D. Pa.)

- Plaintiffs alleged a price-fixing/supply reduction conspiracy among egg producers and their industry cooperatives. A central issue is the coop and the members creating a certification program to respond to animal welfare concerns raised by activists.

- Plaintiffs’ challenged the cooperative as not covered by Capper-Volstead immunity:

- "UEP is not a legitimate co-operative and does not market, process or sell eggs - it is a trade group designed to protect the interests of the egg industry"

- "UEP has members that are not involved in agricultural egg production"- "UEP includes UEA members who are non-Capper-Volstead protected

entities"- "UEP’s supply restriction and price-fixing efforts fall outside of the limited

purposes of the Capper-Volstead Act.“

• Others (DOJ investigations, customer demands, legislative actions).Disclosure: Chris Ondeck represented a Defendant in the Eggs case.

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The Crux of the Issue

• Conducting all external and internal activities, efforts, discussions, and negotiations by a coop and its members in response to costs created by activist attributes in the context of negotiating the resulting costs/prices with customers

• This falls squarely in one of Capper’s most fundamental purposes: negotiating and bargaining with customers about prices and recompensing costs

• Handling the issue of costs resulting from attributes in the context of anything else, or dealing with anyone else, requires careful compliance

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Communicating with Other Constituencies: Bifurcation

• What if a coop or its members have a legitimate need/basis to engage in discussions with an activist group that is not a customer?- If the customers require adherence to a standard the

activist group created/controls/certifies?- If the coop/members believe they can establish a

commonly agreed-to standard (a middle-ground)-To understand what would satisfy the activist group-To communicate the logistical/cost burdens imposed

by individual demands

• Suggestion: Bifurcate

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Bifurcation

• Under this model, discussions of costs, prices, volumes, and everything else that will go into the returns that producers and their coops will seek for their products and efforts would always be in the context of dealing with the customers - NOT the activists

• There can be situations in which the activist group itself wishes to support the producers that comply with their attributes – such as “penny per pound” wage increase translating into equivalent payment by purchasers to the producers (for pass through to meet the additional production cost) – this is legitimate – but careful compliance is needed here

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Lessons-Learned and Practical Advice

• Conduct all activities that could even be perceived as impacting price/costs/volumes solely in the context of bargaining with customers, or working internally on that effort

• Create strict compliance procedures for vetting and maintaining membership records to avoid activist attacks that deficiencies in recordkeeping destroy Capper protection

• Avoid arbitrary penalty provisions against members for noncompliance with any new standards, certifications, surcharges, etc., related to attributes

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Lessons-Learned and Practical Advice (cont’d)

• Strict compliance with all other Capper requirements, especially when a coop is involved in work on costs resulting from activist attributes

• Avoid incidental/accidental discussion of increases in price/reductions in supply in the context of discussions with activists- Board minutes and similar internal documents- Speeches, statements in news articles- Statements by retained third-parties (economists, consultants,

others whose comments might be attributed to the coop/members)

• Do not leave “dangling” legal issues in the records

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Capper Checklist

• All cooperative members must be producers of agricultural products

• The cooperative must operate for mutual benefit of members.

• One member, one vote or no dividends > 8% / year (check state laws)

• At least ½ of product coop deals in is member product (50% Rule)

• No agreements requiring Capper immunity with non-Capper covered entities

• No predatory conduct

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Proskauer Offices

Washington Update

Washington Update

PRESENTER BIOGRAPHY

Lisa Van Doren Vice President and Chief of Staff, Government Affairs National Council of Farmer Cooperatives Lisa Van Doren serves as vice president and chief of staff for government affairs at the National Council of Farmer Cooperatives (NCFC). In this capacity, she oversees NCFC’s government affairs staff and directs NCFC’s public policy agenda. She serves as NCFC liaison to the Congressional Farmer Cooperative Caucus and coordinates the activities of the NCFC Government Affairs Committee. Prior to joining NCFC in March 2008, Lisa was director of public policy for the National Corn Growers Association. She also served as professional staff for the House Committee on Agriculture, and worked in the personal offices of former Rep. Charles Stenholm (D-TX) and former Rep. Ciro D. Rodriguez (D-TX). A native Texan, Lisa was raised in Hondo, about 45 miles west of San Antonio, on a beef cattle and horse ranch. She graduated from Texas A&M University with a Bachelor of Science in Agricultural Development in 1998. Lisa also earned a Masters of Science in Environmental Sciences from The Johns Hopkins University in 2002.

NATIONAL COUNCIL OF FARMER COOPERATIVES50 F Street NW, Suite 900 Washington, DC 20001 Tel: (202) 626-8700 Fax: (202) 626-8722www.ncfc.org | facebook: www.facebook.com/FarmerCoop | twitter: @FarmerCoop

NCFC Position: NCFC supports the continuation of Subchapter T of the Internal Revenue Code (the basis for cooperative taxation) and related regulations. NCFC also supports the continuation of the patronage dividend deduction for farmer cooperatives. The deduction is critical for the continued viability of farmer cooperatives.

Action: NCFC urges Congress to take into account the unique tax status of farmer cooperatives when developing tax reform proposals. NCFC is concerned that several reform proposals would negatively impact farmer cooperatives, and that a lowered corporate rate would not help to offset those impacts.

Current Status: Farmer cooperatives are owned and governed by their farmer members. Earnings from business conducted with or for a cooperative’s members are subject to single tax treatment as income of farmer members, provided the cooperative pays or allocates the earnings to its members. If the earnings are used to support the cooperative’s capital funding or other needs, the earnings are taxed at regular corporate rates when retained and taxed a second time when distributed to the farmer members. Earnings from sources other than business with or for the cooperative’s members are taxed at corporate rates.

Issues of Concern:NCFC Opposes Repeal of the Section 199 Deduction for Domestic Production Activities Income. The Section 199 deduction was enacted as part of The American Jobs Creation Act of 2004 as a jobs creation measure. The deduction applies to proceeds from agricultural or horticultural products that are manufactured, produced, grown, or extracted by cooperatives, or that are marketed through cooperatives, including dairy, grains, fruits, nuts, soybeans, sugar beets, oil and gas refining and livestock. Cooperatives may choose to keep the deduction at the cooperative level, or pass it through to their farmer members, making it extremely beneficial to both. Section 199 benefits are returned to the economy through job creation, increased spending on agricultural production and increased spending in rural communities.

Some have suggested lowering corporate rates to offset the impact of the loss of the deduction. However, because farmer cooperatives’ income is passed through to farmer members, a corporate rate reduction would not benefit cooperatives and their members.

NCFC Opposes Repeal of the Deduction for Interest on Debt. Farmers do not have the resources to satisfy all of their cooperatives’ capital needs. As a result, cooperatives in many cases rely on debt to finance growth. The repeal of the deduction for interest on debt would cause harm to farmer cooperatives that are attempting to expand operations. Repeal of the deduction would prevent cooperatives from new hiring, expansion and new product development.

Tax Reform Priorities


Tax Reform Priorities

NCFC Opposes Repeal of LIFO Accounting Method. The last-in, first-out (LIFO) accounting method is a widely accepted accounting method and is used by some farmer cooperatives. Taxpayers using LIFO assume for accounting purposes that inventory most recently acquired is sold first. If LIFO is repealed, farmer cooperatives and other businesses would be taxed as though they had sold all of their inventory assets, even though they would have received no cash. Obtaining the funds necessary to pay the tax on this deemed sale would cause severe strain on cooperatives’ capital budgets. Taxation of LIFO reserves would be the equivalent of a retroactive tax on the savings of a cooperative.

NCFC Opposes Repeal of Lower of Cost or Market Accounting Method. Using this method, the taxpayer determines an asset’s value using either the original cost or the current replacement cost, whichever is lower. The repeal of this method would harm supply cooperatives because their inventories are comprised largely of commodities susceptible to large variations in value. When commodity prices decline (as in 2009), supply cooperatives must drastically devalue those commodities to reflect a proper carrying value for financial reporting purposes. The repeal of the lower of cost or market accounting method would result in supply cooperatives effectively pre-paying substantially higher income taxes as a result of the disallowed deduction. Key commodities for supply cooperatives include fertilizer; pesticides, herbicides and other agricultural chemicals; grains; feeds; and petroleum products, including diesel, propane and heating oil.

NCFC Opposes Elimination of Patronage Dividend Deduction. Patronage refunds are paid out based on the amount of product delivered or business done by the member with the cooperative. For example, a cooperative receives product grown by the farmer-member and makes an advance payment. Following the sale of the product, the cooperative makes an additional payment reflecting the profit made on the sale. Under well-accepted tax principles, the total business expense deduction taken by the cooperative should include both the advance payment and the patronage dividend. Eliminating the patronage dividend deduction would contradict long-held principles of tax fairness.

Farmer Cooperatives Should Not Be Treated as “Passthrough” Entities. While cooperative earnings are distributed to member-patrons and taxed at the patron level, cooperatives should not be viewed in the same category as partnerships, S corporations, LLCs, or other passthrough entities. Farmer cooperatives are owned and governed by their farmer members and “stand in the shoes” of their members. Farmer cooperatives generate jobs in rural communities and contribute to the economy in all sectors of agriculture and in all geographic regions of the United States. Farmer cooperatives enable their farmer members to bargain for better prices for their products and more favorable terms from their input suppliers. Earnings from those activities should be taxed only once – at the farmer level.

February 2016


GMO Labeling

NCFC Position: A 50-state patchwork of food labeling laws would mislead consumers, raise the price of groceries for American families and do nothing to ensure food safety. Our nation’s food safety and labeling laws should not be set by political campaigns, state legislatures, or local municipalities, but by the U.S. Food and Drug Administration (FDA), the nation’s foremost food safety agency. NCFC supports legislation providing a federal, voluntary genetically modified organism (GMO) labeling framework. We need federal standards for FDA safety review of GMO technology and labeling, so that consumers and food and beverage manufacturers have consistent national regulations they can count on.

NCFC opposes mandatory labeling of food products containing biotech ingredients. The technology behind GMOs in agriculture is proven safe for the environment and consumers, and is key to increasing food production necessary to feed a rapidly growing global population. Acceptance by consumers depends on a continued effort to better inform the public about the environmental and health benefits this technology provides.

Action: NCFC calls on Congress to pass legislation creating a single federal framework for regulating the use and labeling of food products containing biotech ingredients.

Current Status: NCFC co-chairs the Coalition for Safe Affordable Food (CFSAF) which has been working closely with members of Congress to craft legislation preventing mandatory labeling of food products containing biotech ingredients.

On July 23, 2015, the House of Representatives passed H.R. 1599, the Safe and Accurate Food Labeling Act. The bill, sponsored by Representatives Mike Pompeo (R-Kans.) and G.K. Butterfield (D-N.C.), was passed by a vote of 275 Yeas-150 Nays, including 230 Republicans and 45 Democrats voting in favor of the measure. The bill is similar to one introduced last congress but includes new provisions to establish a voluntary non-GMO certification program overseen by the U.S. Department of Agriculture (USDA), allowing food manufacturers to voluntarily label products made without biotech ingredients. The bill also maintains language to codify existing procedures regarding premarket notification to the Food and Drug Administration (FDA) of all new biotech crops entering the marketplace.

The Senate Agriculture Committee held a hearing on Biotechnology on October 21, 2015—its first on the topic in ten years—featuring a panel of agency witnesses from USDA’s Animal and Plant Health Inspection Service, the Environmental Protection Agency, and the Food and Drug Administration, and a second panel of industry witnesses including dairy farmer and Agri-Mark member, Joanna Lidback, a food manufacturer, a medical expert and representatives from Just Label It and Center for Science in the Public Interest.


GMO Labeling

February 2016

Senator John Hoeven (R-ND) agreed to be the lead sponsor of the Senate’s GMO labeling legislation. Last December, the end-of-year Omnibus negotiations provided a window of opportunity to include language preempting state GMO labeling laws in the bill, but was ultimately not included in the final package of legislation.

After the first of the year, Secretary of Agriculture, Tom Vilsack, convened a meeting of stakeholders from the food and agriculture industry and pro-labeling groups in an effort to reach an agreement on a federal solution to GMO-labeling. After two half-day meetings, the group did not reach consensus. The Secretary committed to meeting with House and Senate Agriculture Committee leadership to provide his recommendation for a solution.

NCFC and CFSAF will continue outreach to Senate offices in the coming months to urge for introduction and passage of legislation to find a national solution to GMO labeling.

Background:A new biotechnology food that is “substantially equivalent” (meaning it has the same chemical composition and nutritional value as conventional varieties) does not require a special label. The FDA regulations state that requiring the labeling of foods that are indistinguishable from foods produced through traditional methods would mislead consumer by falsely implying differences where none exist. And according to the 2012 Consumer Survey by the International Food Information Council (IFIC), U.S. consumers overwhelmingly support current federal rules for labeling foods. Of the small percentage of consumers who want more detail on their labels, only three percent (or one percent of the total sample) cited biotechnology as information they would like to see on food labels. The 2012 defeat of California’s ballot initiative, Proposition 37, to mandate the labeling of food products containing biotech ingredients was only the beginning of an onslaught of similar legislative state initiatives. Almost a year later, a comparable proposal in Washington State was on the ballot and also defeated by a narrow margin. Yet, some states have been successful in banning or mandating the labeling of genetically modified products. In June 2013, Connecticut’s Governor signed the country’s first comprehensive food labeling law requiring a label be placed on all products meant for human consumption that contain GMO ingredients. Maine followed shortly after and passed a comparable law. Both pieces of legislation have trigger clauses that will only allow the laws to take effect after four neighboring states enact similar labeling requirements. Vermont lawmakers passed a mandatory GMO labeling bill in April 2014 and it was signed soon after by Vermont Gov. Peter Shumlin. The Vermont GMO labeling legislation is the first in the nation to be passed without trigger clauses similar to those found in bills passed by Connecticut and Maine. The Vermont law is set to take effect on July 1, 2016. GMO labeling also was the subject of debate during consideration of the farm bill in 2013. Several amendments were filed in support of GMO labeling, and one requiring labeling of all GMO products was voted on. The amendment offered by Sen. Bernie Sanders of Vermont failed by a vote of 27 to 71, sending a clear signal that this issue was not supported by an over-whelming majority of the United States Senate.


Food Safety

NCFC Position: NCFC urges that any food safety legislation and regulations be based on sound science—they should also be risk-based and commodity specific. American consumers must have confidence that their food is safe and that the best science is being used to ensure the most wholesome product possible.

Action: As the implementation of the food safety law continues, we must ensure food safety regulations enhance our nation’s food safety, while avoiding negative impacts to farmer cooperatives and their producer members. NCFC will continue to educate members of Congress and the Administration on this important issue, highlighting that America’s farmers and ranchers are committed to providing a safe and affordable food supply for consumers globally.

Current Status: In early 2013, the Food and Drug Administration (FDA) began the process of implementing the Food Safety Modernization Act (FSMA). Since then, FDA has released all seven of the major proposed rules to implement FSMA. After reviewing stakeholder comments, FDA decided significant changes were needed in key provisions of four of the major proposed rules; the Human Preventive Controls, Produce Safety, Foreign Supplier and Animal Feed rules. Due to the significance of these changes, FDA released revised rule language in the fall of 2014 and allowed the public to comment on the revised provisions of those four rules. Currently, five of the seven rules have been finalized and the remaining final rules will be published spring 2016, based on court ordered deadlines.

The first two rules FDA finalized, the Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food rule (Human Preventive Controls rule) and the Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Food for Animals rule (Animal Feed rule), were published on September 10, 2015.

The Human Preventive Controls rule requires covered facilities to create and implement a food safety plan composed of a hazard analysis and risk-based preventive controls. The final rule also updated and clarified binding provisions under the Current Good Manufacturing Practices (CGMPs). Compliance dates are staggered over several years based on size with some businesses expected to comply with the new regulation as early as September 2016.

Business Size CGMPs & Preventive Controls Compliance Dates

Very Small Businesses (averaging less than $1 million per year, adjusted for inflation, in both annual sales of human food plus the market value of human food manufactured, processed, packed or held without sale)

Three Years

*Except for records to support its status as a small business (January 1, 2016)


Food Safety

Businesses Subject to the Pasteurized Milk Ordinance (extended time to allow for changes to the PMO safety standards that incorporate the requirements of this rule)

Three Years

Small Businesses (less than 500 full-time equivalent em-ployees) Two Years

All Other Businesses One Year

Business Classification Compliance Date for Supply Chain Program

If receiving facility is a small business and its supplier will not be subject to the human preventive controls rule or the produce safety rule

Two Years

If receiving facility is a small business and its supplier will be subject to the human preventive controls rule or the produce safety rule

Two Years OR six months after the supplier is required to comply with the applicable rule, whichever is later

If receiving facility is not a small or very small business and its supplier will not be subject to the human preventive controls rule or the produce safety rule

18 Months

If receiving facility is not a small or very small business and its supplier will be subject to the human preventive controls rule or the produce safety rule

Six Months after the supplier is required to comply with the applicable rule

The Animal Feed rule, similar to the Human Preventive Controls rule, requires covered facilities to create and implement a food safety plan composed of a hazard analysis and risk-based preventive controls. The final rule sets requirements for a written food safety plan and baseline CGMP standards for producing animal food.

Business Size CGMP Compliance Date Preventive Controls Compliance Date

Business other than small and very small One Year Two Years

Small business (less than 500 full-time equivalent employees) Two Years Three Years

Very small business (averaging less than $2,500,000, adjusted for inflation, per year, during the 3-year period preceding the applicable calendar year in sales of animal food plus the market value of animal food manufactured, processed, packed, or held without sale (e.g., held for a fee or supplied to a farm without sale).

Three Years

Four Years

*Except for records to support its status as a very small business (January 1, 2017)

The next three final rules, the Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Con-sumption rule (Produce Safety rule), the Foreign Supplier Verification Programs for Importers of Food for Humans and Animals rule (Foreign Supplier rule) and the Accreditation of Third-Party Auditors/Certification Bodies to Conduct Food Safety Audits and to Issue Certifications rule (Accreditation rule) were published on November 27, 2015.


Food Safety

The Produce Safety rule involves enforceable science- and risk-based safety standards for the production and harvesting of produce on farms. This regulation is significant as it is the first time the FDA has regulated farm activity. The final rule imposes new standards for growers on water quality, testing, manure use, worker training and the presence of animals in production fields. However, there are exemptions for produce rarely consumed raw, produce used for personal or on-farm consumption, and farms with produce sales of $25,000 or less.

Compliance dates for covered actives (except for those involving spouts) after the effective date if the final rule are:Size of Covered Farm: Compliance Date:Very small businesses (businesses with more than $25,000 but no more than $250,000 in average annual produce sales during the previous three year period) Four Years

Small businesses (businesses with more than $250,000 but no more than $500,000 in average annual produce sales during the previous three year period) Three Years

All other farms Two YearsThe compliance dates for certain aspects of the water quality standards, and related testing and recordkeeping provisions, allow for an additional two years beyond each of these compliance dates.

The Foreign Supplier rule would require importers to ensure that food brought into the United States is in compliance with our domestic food safety standards, including identifying and evaluating potential hazards and properly labeling food allergens.

Importers must comply with the Foreign Supplier Verification Program regulations by May 2017. For the importation of food from a supplier that is subject to the Preventive Controls or Produce Safety rules, the compliance date is six months after the foreign supplier is required to meet those relevant regulations. For an importer that is a manufacturer or processor, subject to the supply-chain program provisions in the Preventive Controls rule, they will need to comply by the date specified in those provisions.

The Accreditation rule establishes a voluntary program for the accreditation of third-party certification bodies or auditors to preform food safety audits and certify facilities abroad. Foreign entities may use certifications to qualify for participation in the Voluntary Qualified Importer Program (VQIP) which allows for expedited review and entry of products into the U.S. The certifications also ensure the safety of the food foreign entities are shipping to U.S. consumers. Compliance dates are contingent on FDA finalizing the Model Accreditation Standards guidance and user fees for accreditation and certification bodies.

The sixth proposed rule, the Focused Mitigation Strategies to Protect Food Against Intentional Adulteration rule (Intentional Adulteration rule) was released in December 2013. This rule would require both domestic and foreign facilities to maintain a written plan that addresses significant vulnerabilities in their food operation that could avail themselves to intentional adulteration. The FDA has recognized four key activities within the food system which are most vulnerable to forms of adulteration that could cause large scale public harm. These activities include bulk liquid receiving and loading; liquid storage and handling; secondary ingredient handling; and mixing and similar activities.

The rule would apply to facilities that manufacture, process, pack, or hold food and are required to register as a food facility under section 415 of the Federal Food, Drug, and Cosmetic Act (FD&C Act). The rule would not apply to farms or those food facilities currently not required to register under section 415 of the FD&C Act. The final rule is set to be finalized on May 31, 2016.


Food Safety

February 2016

In January of 2014, the FDA released the seventh and final major proposed rule of FSMA, the Sanitary Transportation of Human and Animal Food (Sanitary Transportation rule). The proposed rule requires those who transport food to use sanitary transportation practices to ensure the safety of food being transported. The rule would establish requirements for vehicles and transportation equipment, transportation operations, information exchange, training of carrier personnel, recordkeeping and waivers.

The rule would apply to shippers, receivers, and carriers who transport food in the U.S. by motor or rail vehicle, regardless of whether or not the food enters interstate commerce. The final rule is expected on May 31, 2016.

NCFC awaits the publication of all seven FSMA final rules and will work with the Agency and our members to ensure a successful implementation of the law.


Immigration Reform

NCFC Position: U.S. agriculture faces a critical shortage of workers every year, as citizens are largely unwilling to engage in these rigorous activities and guestworker programs are unable to respond to the marketplace. This situation makes our farms and ranches less competitive with foreign farmers and less reliable for the American consumer. NCFC supports legislative reform that includes both a program to provide access to a legal workforce into the future and an adjustment for current experienced, unauthorized agricultural workers.

Action: NCFC and the Agriculture Workforce Coalition (AWC) remain steadfast in our advocacy of immigration reform that meets the needs of all of agriculture and provides a lasting solution to the issue of current and future agricultural labor in the U.S. Agriculture’s crisis must be addressed through legislative reform which includes an adjustment for current agricultural workers who lack proper work authority and a new guestworker program to meet future needs.

Current Workforce

In order to minimize the impact on current economic activity, NCFC supports an adjustment of status for experienced, but unauthorized, agricultural workers who currently reside in the U.S. This adjustment should include the following components:

• These workers have a future obligation to work for a number of days annually in agriculture for several years.

• Upon completion of this future work obligation, the workers could obtain permanent legal status and the right to work in whatever industries they choose, including agriculture.

Guestworker Program

A new guestworker program will ensure agriculture’s future legal workforce. The new program must offer both employer and employee choice and flexibility through two different work options: an “At-Will” visa and a Contract visa. These should be three-year visas valid for employment with agriculture employers registered through the USDA. These visas need to be separate from the low-skilled visas for the general business community.

• “At-Will” Visa employees have the freedom to move from employer to employer without any contractual commitment, replicating the way market forces allocate the labor force now.

• Contract Visa employees commit to work for an employer for a fixed period of time, giving both parties increased stability where it is mutually preferred.


Immigration Reform

February 2016

Current Status:In November 2014, President Obama released a series of Executive Actions on immigration. The two most significant elements for employers involve deferred deportation for certain unauthorized immigrants currently in the U.S. and a change in enforcement prioritization for U.S. Citizenship and Immigration Services (USCIS).

Under the Actions, an unauthorized immigrant who has been in the country continuously since before January 1, 2010, and who is the parent of a U.S. citizen or legal permanent resident, is eligible to apply for deferred deportation. If the individual still qualifies after a background check and their family ties can be verified, the individual will be allowed to stay and work in the U.S. for a 3 year period.

USCIS will shift enforcement priorities to the border instead of workforce raids and I-9 audits, focusing on apprehending terrorists, criminal aliens and those trying to cross the border illegally.

The President’s Actions were quickly challenged by 26 states, which filed suit to prevent their implementation. In February 2015 a U.S. district court judge blocked the Executive Actions on procedural grounds, and on May 26, 2015, the Fifth Circuit denied the Administration’s request to allow the Executive Actions to go into effect pending appeal of the district court’s ruling.

On November 9, 2015, the U.S. Court of Appeals for the 5th Circuit ruled 2-to-1 in favor of upholding the lower court’s injunction blocking the Obama administration from executing the deferred action program. The Department of Justice has filed a petition for certiorari in the U.S. Supreme Court, but it is not yet known whether the Court will hear the case. In the meantime, the Executive Actions remain on hold until the case is resolved, which may not occur before the end of President Obama’s term.

President Obama’s Executive Action may help the agriculture industry to a very limited extent, but could also harm the industry through workforce attrition. Regardless, the only true fix to agriculture’s workforce crisis is a legislative solution.

Background:Farmers and ranchers have long experienced difficulty in obtaining workers who are willing and able to work on farms and in fields. Jobs in agriculture are physically demanding, conducted in all seasons and are often transitory. To most U.S. residents seeking employment, these conditions are not attractive. Yet, for many prospective workers from other countries, these jobs present real economic opportunities.

Past legislative proposals (e.g. AgJOBS, HARVEST Act, BARN Act and other bills) have attempted to reform the H-2A program to ensure a future workforce in agriculture. However, it is apparent that those proposals are no longer viable to meet agriculture’s needs. Multiple H-2A regulatory changes and rigid program administration have made use of an already difficult program nearly impossible. A national survey conducted by the National Council of Agricultural Employers of H-2A employers under the current rules showed that administrative delays result in workers arriving on average 22 days after the date of need causing an economic loss of nearly $320 million for farms that hire H-2A workers. Costly recruitment requirements result in less than 5 percent of those referred by the government working the entire contract period.

Agriculture needs a program that functions as efficiently as the current free market movement of migrant farm workers while providing the security of a contractual relationship in areas where there is little migration. Having lost confidence in the H-2A structure as a framework for future success, agriculture is seeking the new approach outlined above to ensure a legal, reliable, long-term workforce for all sectors of the industry.


Clean Water Act Jurisdiction

NCFC Position:Farmer-owned cooperatives support protecting the “waters of the United States” (WOTUS); agriculture has a vital role in protecting upstream water quality and drainage features, which also improves downstream navigable waters. The Clean Water Act (CWA) clearly and directly provides for our efforts to protect upstream waters without making them WOTUS. Yet the final WOTUS rule issued by the U.S. Environmental Protection Agency (EPA) and Army Corps of Engineers (the Corps) (together known as the “Agencies”) makes many upstream waters and drainage features WOTUS, unlawfully in our view.

Action:NCFC strongly supports legal and legislative efforts to prevent the new WOTUS rule from being implemented as written and to force the federal agencies into a more thoughtful and judicious process, properly limited by a sound reading of the CWA. While we welcome the few changes made to the rule that address some of our concerns, their value is largely negated by the scope and reality of what remains. NCFC believes the Agencies should focus on using the existing federal and state programs to protect water quality in these upstream features rather than making them subject to federal jurisdiction.

Current Status:The WOTUS rule officially went into effect on August 28, 2015. The rule will result in greater federal regulatory controls of day to day farming and ranching operations, higher costs and inefficiencies, without any new improvements to upstream or downstream water quality. These consequences may not be evident in the first year or two of the rule’s implementation, but it clearly sets the stage for such outcomes, either by agency action or the result of lawsuits that would force such outcomes.Questions remain as to which level of the federal court system challenges to the WOTUS rule should be addressed. As a result, multiple district and appeals court suits have been filed. The appeals court suits have been consolidated in one case before the 6th Circuit Court of Appeals. The district court system declined to consolidate the district court challenges. The federal district court in North Dakota granted a preliminary injunction halting the rule in 13 states. The 6th Circuit Court has stayed the rule nationwide and is now wrestling with the question: should it be the proper venue or the district courts? Timing on this decision is unknown, but ultimately this matter could end up before the Supreme Court. Venue determinations would need to be resolved before the substantive questions about the rule’s lawfulness can be addressed. Legislative efforts to halt the rule in 2015 and already in 2016 have so far failed, but the rule’s opponents in Congress have not stopped their efforts. In the meantime, given the 6th Circuit’s national stay, the EPA and Army Corps are operating under the pre-August 2016 version of the WOTUS rule. For the first time, the agencies will be compiling all of the WOTUS jurisdictional



determinations being made and posting them online in one place. For now, only jurisdictional determinations made by the Corps are available. Here is the website describing their efforts and with a link to the Corps’ determinations:

www.epa.gov/cleanwaterrule/approved-jurisdictional-determinations-under-clean-water-rule

Background:This rule is critical to farmers and ranchers because it changes the entire federal regulatory landscape for agriculture. Many essential and commonplace farming and ranching practices may now be taking place in federally-protected WOTUS. Practices that once qualified for the Clean Water Act’s agricultural stormwater exemption may now result in “point source discharges” of “pollutants” into WOTUS. Since unpermitted discharges of “pollutants” into WOTUS are unlawful, these actions can carry large penalties, even if the farmer or rancher had no knowledge that a water feature on their operation is a WOTUS. Below is a summary of some of the key provisions of the final rule that relate to features commonly found on farms and ranches.

Provision Comment

Prairie potholes, Carolina and Delmarva bays, pocosins, western vernal pools, and Texas coastal prairie wetlands – The final rule adds an entirely new provision, declaring that for the purposes of jurisdictional determinations, the above wetland and water features within a major watershed can be assumed to be “similarly situated” and therefore are found to be jurisdictional if these wetlands collectively have a “significant nexus” to the jurisdictional water at the lower end of the watershed that drains it.

The Agencies defined significant nexus very broadly in the final rule, and state that only one of the several elements of this definition need to be found to make the nexus significant. Given this, it seems inevitable that most if not all of these wetlands and water features in these categories will be WOTUS. This is a major change with significant negative consequences for farmers and ranchers.

Tributaries – The definition of tributary is largely unchanged and it still relies on observations of a so-called bed, bank, and Ordinary High Water Mark (OHWM). These things can be seen even in features without ordinary flow.

The Agencies know that the term OHWM is ambiguous and it is applied inconsistently. This means that drainage features with water in them only after it rains or for a few weeks can be claimed as WOTUS. Furthermore, the Agencies have been known to assert the past existence of indicators of these features at a location, and assert jurisdiction over the feature since it once met the definition. This measure has changed little from the proposed rulemaking, and as such remains a major problem with the rule.



Erosional features – The final rule modifies the proposed rule by using the term “erosional features” to refer to gullies and rills, and these are excluded from being WOTUS. But the Agencies go on to say that erosional features are not excluded where they exhibit bed, banks and OHWM. They say that gullies, for example, can exhibit these features and would be jurisdictional.

While they have excluded erosional features from jurisdiction, by then noting that such features can have the highly ambiguous bed, bank and OHWM features, in practice we expect many “erosional features” will be recaptured as WOTUS through a decision in the field. While the Agencies have expanded upon this exclusion relative to the proposed rule, in effect it has been structured in a manner that offers little substantive benefit.

Grass Waterways – The final rule’s erosional features’ exclusion includes a new item not in the proposed rule; grass waterways that are “lawfully constructed.”

Counterintuitively, in their attempt to exclude grass waterways, the final rule will end up leading to a requirement that a federal CWA permit will be needed to construct one. The rule’s preamble says that “lawfully constructed” means “most commonly” that a grass waterway was constructed according to a federal CWA permit. Such permits are only needed in jurisdictional waters; the erosional feature in which the grass waterway was built would otherwise be a tributary with a bed, bank and ordinary high water mark, and therefore categorically a WOTUS. If this reading of the new measure is correct, it is a major change leading to significant problems.

Adjacency – The final rule curtails the proposed rules’ basically limitless application of the floodplain concept to find encompassed waters as WOTUS. It does this by defining “neighboring” as being either within 100 feet of a jurisdictional water, or within the 100-year floodplain of a jurisdictional water and not more than 1,500 feet from such water.

While this is still very aggressive in its scope, it is an improvement of the possibly limitless standard in the proposed rule.

Adjacency and normal farming – The final rule goes one step further by adding that “waters” in which “normal” farming, ranching or silvicultural practices under Clean Water Act Section 404(f) are being carried out cannot be found categorically jurisdictional. This would exclude from categorical jurisdiction isolated wetlands and wetspots (not captured under the prairie pothole provisions above) in which farming is taking place.

This is a major positive change, perhaps the most important development in the final rule for agriculture. Unfortunately, to qualify for this exclusion for such wet areas, the farmer will likely have to go to the Corps for a determination that the area and practices in it qualify for 404(f) normal farming exemption. The Corps is known to grant the 404(f) exemption very grudgingly. At a minimum, it introduces bureaucratic difficulties, uncertainties and risks. This change is a significant improvement over the proposed rule, but in tying it to obtaining a 404(f) exemption decision by the Corps, most farmers will find these benefits quite limited.



Ditches – The final rule modifies the discussion of the proposed rule’s exclusion of certain ditches. Exempted are ditches with 1) ephemeral flow that are not a relocated tributary or excavated in a tributary; 2) ditches with intermittent flow that are not a relocated tributary, excavated in a tributary, or drain wetlands; and 3) ditches that do not flow, either directly or through another water, into a jurisdictional water.

Many drainage features in farm fields are former ephemeral or intermittent streams that have been improved and are maintained for drainage purposes. While some roadside and field-side ditches in farm country will be excluded under this provision, when field-side or roadside ditches convey drainage from a former ephemeral stream improved for drainage, or from a field’s erosional feature that is deemed to have a bed, bank and OHWM (see above), they do not qualify for the exclusion. To the extent that this is common in an area, the ditch exclusion has limited value.

Puddles – The final rule adds an exclusion for “puddles.”

The Agencies state that they don’t think puddles were jurisdictional under the proposed rule, but have included it here as an express exclusion to make that clear. Puddles are very small depressions in the ground that hold water in them for a short period after it rains.

February 2016


Pesticides & the Clean Water Act

NCFC Position: Pesticides play an important role in protecting the nation’s food supply, public health, natural resources, infrastructure and green spaces. They are used not only to protect crops from destructive pests, but also to manage mosquitoes and other disease carrying pests, invasive weeds and animals that can choke our waterways, impede power generation and damage our forests and recreation areas. However, pesticide users must now comply with a new, added requirement that certain pesticide applications – already stringently regulated under the FIFRA – obtain a Clean Water Act (CWA) National Pollutant Discharge Elimination System (NPDES) permit issued by the Environmental Protection Agency (EPA) or delegated states. Legislation is needed to clarify that federal law does not require water permits for FIFRA-compliant pesticide applications.

Action: NCFC seeks legislative action to remedy counterproductive regulatory measures, resource burdens and legal liabilities created by the NPDES general permit for certain pesticide applications. Specifically, we urge Congress to pass legislation clarifying that NPDES permits are not required for FIFRA-registered pesticides when applied according to their product label.

This issue now takes on new importance in light of the unprecedented overreach by EPA in the recently-finalized regulation redefining what qualifies as a “water of the United States.” The number and nature of pesticide applications subject to permitting will see a significant increase due to the expansion of EPA’s definition of what is considered a water of the U.S.

Current Status: On June 3, 2015, Senators Mike Crapo of Idaho and Claire McCaskill of Missouri along with 13 additional Senators introduced companion legislation called the Sensible Environmental Protection Act (S. 1500), which is similar to legislation introduced in the Senate during the 113th Congress. The Senate Environment and Public Works Committee favorably approved S. 1500 in October, reading it for consideration by the full Senate.

On January 20, 2016, Senator Mike Crapo (R-ID), along with Senators Deb Fischer (R-NE) and Tom Carper (D-DE), offered S. 1500 as an amendment during the mark-up of S. 659, the Bipartisan Sportsmen’s Act of 2015, by the Senate Environment and Public Works Committee. The amendment was adopted on a bipartisan vote and incorporated into S. 659. NCFC joined numerous stakeholders in support of this amendment.


Pesticides & the Clean Water Act

Action in the House of Representatives on this issue also is pending. On February 11, 2015, H.R. 897, the Reducing Regulatory Burdens Act of 2015, was introduced and referred to the House Committees on Agriculture and Transportation and Infrastructure. The House Agriculture Committee held a mark-up on their portion of the bill on March 19 and reported it out of committee. The bill is awaiting action by the Transportation and Infrastructure Committee, and like previous Congresses, we anticipate bipartisan support on the floor.

Whether as a stand-alone or incorporated into a larger measure like the Sportsmen’s Act, NCFC will continue to seek legislation to clarify that NPDES permits are not required for FIFRA-registered pesticides when applied according to their product label.

Background: NCFC strongly supports the registration and re-registration of pesticide products under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) is founded on robust science, ensuring that products in the marketplace can be used while offering the desired protections for human health and the environment. The FIFRA label is the law; users who do not follow the label are in violation of federal law.

In the 112th Congress, the Reducing Regulatory Burdens Act of 2011 - then, H.R. 872 - convincingly passed the House Committee on Agriculture and went on to pass the House of Representatives on suspension. In the 113th Congress, the Act was reintroduced as H.R. 935. Strong bipartisan support was again demonstrated by the bill’s passage out of the House of Representatives.

Late last year, EPA took comments on an Information Collection Request (ICR) on the likely costs and burdens associated with the upcoming 2016 revisions to EPA’s and states’ NPDES general permits for pesticides applied into, over or near a “water of the U.S.” (WOTUS). Comments were filed highlighting the broad concurrence of state water agencies that no environmental benefits ensue from this double permitting, current economic and legal burdens, and the redundant compliance requirements of the NPDES permits given EPA regulation of such pesticide use under FIFRA.

February 2016

Accounting Standards

Accounting Standards Update: Revenue from Contracts with Customers

MODERATOR BIOGRAPHY

David Antoni Managing Director, Tax KPMG LLP

David F. Antoni, Managing Director, Tax, KPMG LLP, serves as national director of cooperative tax services. Dave is responsible for providing tax consulting and compliance services to cooperatives and non-cooperative enterprises in our Consumer & Industrial Markets practice. Dave also serves on KPMG’s National FAS 109 Network and has significant experience in the application of FAS 109 and FIN 48 to both our cooperative and public company audit clients. Dave works with management and boards on tax considerations for capital and bylaws provisions and advises cooperatives on tax issues such as IRC section 199 and the new repair regulations.

Dave’s professional accounting experience with KPMG spans over 29 years and 25 years serving cooperatives as a focus area.

Dave holds a Bachelor of Science degree in Business Administration (cum laude) from La Salle University, Philadelphia, Pennsylvania, where he concentrated in accounting and computer Science and was a member of the Beta Alpha Accounting Society. Dave also has completed several graduate level tax courses in Villanova University School of Law’s Master of Science in Taxation program.

Dave is currently a board member (and past treasurer) of the Capitol Chapter of the National Society of Accountants for Cooperatives (NSAC) and served as immediate past chair of its National Tax Committee. He is also a member of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives and serves as vice chair of subcommittee on Overview of New Tax, Other Legislation and Implementation Issues Affecting Farmer Cooperatives, and is a member of the American Institutes of Certified Public Accountants.

Dave is a frequent speaker concerning tax issues related to cooperatives at annual meetings of the NSAC and contributes articles to the Tax Fax Column of NSAC’s The Cooperative Accountant publication. Dave authors KPMG’s Tax News Flash – Cooperatives publication and hosts and facilitates discussions on cooperative tax topics at KPMG’s Annual Cooperative Roundtable.

PRESENTER BIOGRAPHIES

Catherine Lee Director, Accounting Advisory Services KPMG LLP

Catherine Lee is a Director in KPMG”s Accounting Advisory Services group which provides technical accounting guidance as well as financial reporting assistance to clients who are contemplating or have recently completed a material event or transaction such as the implementation of a new accounting standard, a transaction involving strategic acquisitions or divestitures of specific parts of the business, fresh start accounting for companies emerging from bankruptcy, and companies planning an initial public offering (IPO).

Since joining the practice in 2005, Catherine has provided technical accounting support related to the following accounting topics: revenue recognition, stock compensation, and foreign currency. This work includes SEC filings, offering memorandums, sell-side assistance, and conversions to U.S. GAAP and International Financial Reporting Standards. She also has extensive experience with business combination, fresh start reporting, sell-side, and IPO accounting services.

Catherine is also a member of the KPMG Revenue Recognition Network.

Eric Lucas Principal KPMG LLP

Eric Lucas is the principal-in-charge of the Income Tax and Accounting group in KPMG’s Washington National Tax practice. Eric’s practice focuses on the emerging issues associated with the tangible property regulations, inventories, cost recovery and many other matters involving methods of accounting and general tax principles.

Prior to joining KPMG, Eric was with the U.S. Department of the Treasury’s Office of the Tax Legislative Counsel, where he served as an attorney advisor. In this role, Eric was a member of the working group that revised the tangible property regulations under section 263(a) in response to practitioner and taxpayer comments. The working groups included a number of key government officials from the IRS Office of Chief Counsel (for example, fixed asset specialists) and the IRS Commissioner’s office. In addition to focusing on the tangible property regulations, Eric worked with IRS personnel in crafting guidance on a number of difficult accounting methods issues, including the section 263A regulations for sales based royalties and negative amounts, the section 381 regulations, long- term contracts (percentage of completion), business credits, and general domestic tax issues. Eric has over 17 years (including three years with the Treasury Department) of professional experience that includes positions with the IRS Chief Counsel’s Income Tax and Accounting Division and the accounting methods practices of the Big Four accounting firms.

Eric is a frequent speaker to such groups as the Tax Executives Institute, Tax Section of the American Bar Association, the American Institute of Certified Public Accountants, the Federal Bar Association and Georgetown University’s LL.M. program in taxation.

National Council of Farmer Cooperatives ASC 606, Revenue from Contracts with Customers February 2016

Agenda ■ Introduction and background ■ Overview of the new standard ■ Potential impacts on Farmer

Cooperatives ■ Assessing the Impact of the

New Standard ■ Wrap-up and Q&A

2 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.FOR INTERNAL USE ONLY

Catherine M. Lee Director

Tel: 480-459-3527 [email protected]

Eric Lucas Principal


With You Today

■ Eric Lucas is the principal-in-charge of the Income Tax and Accounting group in KPMG’s Washington National Tax practice. Eric’s practice focuses on the emerging issues associated with the tangible property regulations, inventories, cost recovery and many other matters involving methods of accounting and general tax principles

■ Prior to joining KPMG, Eric was with the U.S. Department of the Treasury’s Office of the Tax Legislative Counsel, where he served as an attorney advisor

■ Catherine is a Director in KPMG’s Accounting Advisory Services group in the Phoenix office.

■ Currently leading multiple projects for Fortune 500 clients including accounting change projects such as implementation of ASC 606 – Revenue from Contracts with Customers.

■ Member of the KPMG Revenue Recognition Network

■ Dave is KPMG’s National Director of Cooperative Tax Services and services cooperative clients on a national basis. Dave specializes in Federal Tax. Dave provides tax services to our Consumer and Industrial Market clients

■ Dave’s professional accounting experience with KPMG spans 29 years of which for 25 years serving cooperatives has been a focus area.

David Antoni Tax Managing Director



Objectives of the New Revenue Recognition Standard

Remove inconsistencies and weaknesses in existing

requirements to improve comparability

IASB / FASB* Converged Standard

Provide a more robust framework for

addressing revenue issues

Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework

Provide more useful information through improved disclosure

requirements

*IASB: International Accounting Standards Board / FASB: Financial Accounting Standards Board


The core principle and the five-step model

An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Core Principle

Identify the contract(s) with a customer 1

Identify the performance obligations in the contract 2

Determine the transaction price 3

Allocate the transaction price to the performance obligations in the contract 4

Recognize revenue when (or as) the entity satisfies a performance obligation 5


Timing of New Revenue Recognition Standard

Depending on transition method and length of contracts, some companies will soon need to start preparing to address:

■ Process and system changes

■ Enabling dual reporting during transition period

■ Dealing with unanticipated complexity

■ Maximizing the use of internal resources by spreading work over longer period

Timeline effective dates shown are for public entities with December 31 year ends. Effective January 1, 2019 for private companies.

2019 2017 2014 2015 2018 2016

January 1st

Retrospective transition

application date

January 1st

Effective date for public companies

May 28, 2014

Final standard

This reflects the FASB’s decision to defer the standard by one year.

The IASB has indicated it may also propose a one year deferral.


Transition Approaches

The following chart summarizes the transition options available to entities (based on non-public entity with a December 31st year end)

Transition Method 2016/2017 2018 Date of Cumulative Effect Adjustment

Full Retrospective Restate for all contracts Apply to all contracts January 1, 2016

Retrospective Using One or More Practical Expedients

Restate for all contracts except for contracts or estimates covered by the practical expedients elected by the entity

Apply to all contracts January 1, 2016

Cumulative Effect at the Date of Adoption

No contracts restated; reported on the basis of legacy guidance. Apply only to open contracts at adoption

Apply to all contracts January 1, 2018

■ Cumulative effect approach would not require restatement of the five-year selected financial data table; retrospective approach may

■ For SEC registrants electing retrospective application, the cumulative effect adjustment date may actually be January 1, 2013, as selected 5 year financial data may be required by the SEC. Pending further guidance from the SEC


Choice of Transition Method Impacts Implementation

Fiscal 2013 and prior Fiscal 2014 Fiscal 2015 Fiscal 2016 Fiscal 2017 Fiscal 2018

Fiscal 2019 and beyond

Cumulative Effect Method

Evaluate Existing Contracts for Cumulative Effect

Adjustment

Maintain New Systems and

Processes

Maintain Existing Systems and Processes for Legacy GAAP Reporting

Retrospective Method

Evaluate Existing Contracts for Cumulative Effect

Adjustment

Consider Requirements for

5-year table Maintain New Systems and Processes

Maintain Existing Systems and Processes for Legacy GAAP Reporting

Dual reporting capability

Dual reporting capability

Timeline is based on requirements applicable to a public entity with December 31 year end. Nonpublic entities may defer application of standard for one year beyond public entity effective date.


Key Potential Impacts to Farmer Cooperatives

■ Payment terms

Step 1: Identify the contract(s) with a customer

■ Variable consideration Step 3:

Determining the transaction price

■ Principal vs. agent considerations Step 5: Recognizing revenue


Identifying the Contract with a Customer

A legally enforceable contract can be oral or implied by the entity’s customary business practices, but needs to meet all of the following requirements.

The parties have

approved the contract and committed

to their obligations

It has commercial substance The entity can identify

each party’s rights regarding goods or

services

It is probable that the entity will

collect the amount of consideration to

which it ultimately will be entitled

The entity can identify the payment terms for the goods or services

Step 1


Step 3: Determine the transaction price

Transaction price = The amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer

(excluding amounts collected on behalf of third parties)

Variable consideration

and the constraint

Significant financing

component Collectibility Noncash

consideration

Consideration payable to a

customer


Estimating variable consideration

Variable consideration may be a result of discounts, rebates, refunds, credits, incentives, performance bonuses/penalties, royalties, price concessions, rights of return, or other items

Initially estimate the transaction price using either of the following methods (use the more predictive method):

The expected value (probability-weighted amount) The most likely amount OR

Consider all information reasonably available when making the estimate

Update the estimate of transaction price at each reporting period

Exception: This guidance does not apply to sales- or usage-based royalties on licenses of intellectual property


Estimating variable consideration – Example

Scenario

■ Consultant enters into a contract and promises to provide cost management consulting services to Customer over a six-month period

■ Customer promises to pay $20,000 at the beginning of each month (total of $120,000). At the end of the contract, the consultant either will give the customer a refund of $10,000 or will be entitled to an additional $15,000, depending on the customer’s level of cost savings. There are two possible consideration amounts under the contract ($135,000 or $110,000)

■ Consultant believes there is a 90% chance it will be entitled to $135,000 and a 10% chance of $110,000


Estimating variable consideration – Example (continued)

Evaluation

■ Because there are only two possible consideration amounts under the contract, Consultant determines that using the most likely amount provides the best prediction of the amount of consideration to which it will be entitled

■ As a result, Consultant uses $135,000, the single most likely amount, as its initial estimate of the transaction price

■ The consultant would then consider whether the transaction price should be constrained


Constraining variable consideration

Constraint on Variable Consideration

■ Assess whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with variable consideration is subsequently resolved

■ If an entity expects that some, but not all, of the estimated amount of variable consideration in the transaction price would not result in a significant revenue reversal, include that amount in the transaction price.

Assessment

■ The likelihood of a downward adjustment in the estimate of variable consideration, and

■ The magnitude of the possible reversal when the uncertainty is resolved


Use judgment when assessing the constraint

Consider the following:

■ Susceptibility to factors outside the entity’s influence

– Volatility in a market

– Weather conditions

– Risk of obsolescence

■ Period of time to resolve variable consideration

■ Experience with similar types of contracts

■ Practice of offering price concessions

■ Contracts with a large number and broad range of possible consideration amounts


Constraint on variable consideration – Example

Scenario

■ Company A sells a newly constructed property to Company B (a customer) for $2M, with a right to receive 5% of future operating profit from the property over the next 10 years, without any ongoing performance obligations.

■ The company can reasonably estimate some portion of the variable consideration in the amount of $50K relating to years 1 and 2 (confidence level is “probable” that a significant reversal in the amount of cumulative revenue recognized ($2,050,000) will not occur). The entity cannot reasonably estimate its participation for years 3 to 10.


Constraint on variable consideration – Example (continued)

Evaluation

■ $2,050,000 is recognized as revenue when control of the property transfers.

■ Additional future participation amounts are recognized when the amounts can be estimated with sufficient confidence to pass the constraint.


Principal vs. Agent— Proposed changes

If entity controls the goods or the right to services in advance of

transferring those goods or services to the customer

Entity is primarily responsible for

fulfilling the promise to provide the

specified good or service

Entity has discretion in

establishing prices

Entity has inventory risk

Entity has credit risk

Indicators that an entity controls the specified good or service before it is transferred to the customer

then

Entity is principal in the transaction

Revenue recognized gross

Is the performance obligation to provide specified goods or services or to arrange for the other party to provide goods or services?

If entity does not obtain control of the goods or the right to services in advance of transferring those goods or services to the customer, the entity is an agent and recognizes the net amount of revenue.


Tax revenue recognition standards

Overview ■ The accrual basis standard for revenue recognition for tax purposes is the “all

events test”: – All events have occurred which fix the right to receive the income, AND – The amount can be determined with reasonable accuracy – This generally translates to the earliest of when received, due, or earned

■ There are also specific rules for revenue recognition for certain items/industries – Examples include:

■ Deferral of advance payments for goods or services – Revenue Procedure 2004-34 – Treas. Reg. § 1.451-5

■ Non-accrual experience method ■ Subscription income ■ Percentage of completion


Accounting method changes

Procedures for changing tax accounting methods ■ File Form 3115

– Automatic – Rev. Proc. 2015-14 ■ Deemed consent by filing ■ No user fee ■ Subject to IRS review on exam

– Non-automatic Rev. Proc. 2015-13 ■ User fee ■ Filing deadline ■ Subject to IRS National Office review

■ Section 481 adjustment ■ Audit protection Notice 2015-40 ■ IRS request for comments


Summary of income tax implications

Common approach: “tax follows books” More efficient, avoids book-tax differences. Tax requirements frequently differ from GAAP. If “tax follows books” and books changes course, the options are Tax stays put (no change, creates book-tax difference)

o Was former method consistent with tax law?

o May need new process for tracking/compliance;

Tax shifts to follow the new book treatment Is the new book method consistent with tax law?; or

Tax changes to something completely different

If tax doesn’t follow book, reporting for book-tax difference continues No concerns unless current tax method impermissible.


Example – price protection


■ New standard requires an estimate of variable consideration to be included in transaction price if it is probable that amount will not result in significant revenue reversal when uncertainty is resolved

■ For tax, revenue from sale recognized under all events test at point of sale.

■ Example – retailer provides price protection for 3 month period following sale

- $100 sale – management estimates 3 percent reimbursement for price protection

Revenue 2014 2015 2016 2017

Current Book $100 ($3)

Future Book $97

Tax (no change) $100 $(3)


Example - on-time delivery bonus


■ New standard requires an estimate of variable consideration (e.g., performance bonuses, incentives) to be included in transaction price if it is probable that amount will not result in significant revenue reversal when uncertainty is resolved

■ For tax, variable consideration generally does not trigger income until contingency is resolved (similar to current GAAP treatment)

■ Example – revenue from inventory sales – seller receives bonus for on-time delivery over three year period:

Revenue 2014 2015 2016 2017

Current Book $200 $200 $200 $400

Future Book $250 $250 $250 $250

Tax (no change) $200 $200 $200 $400


Assessment approach – Best practices

2. Design

1. Assess

3. Implement


Assessment approach – Best practices (continued)

Process and Information Gap

Analysis

Technology and Broader Impact

Evaluation

Accounting Diagnostic

Transition Option Assessment

2. Design

1. Assess

3. Implement




Analysis


Evaluation



■ Establish project governance

− Project leader

− Project sponsor

− Steering committee that includes key stakeholders

■ Identify potential gaps to accounting policy, financial statement presentation (including timing and amount of revenue recognized), and disclosures by reviewing current accounting policy and sample of contracts

■ Involve business unit accounting personnel

■ Keep abreast of Transition Resource Group activities and other industry-wide views, as some accounting interpretations will evolve over time

■ Monitor FASB standard setting activities – FASB staff papers and Board discussions may provide insight into how to apply the standard

■ Materiality plays a role

■ Be prepared to uncover deficiencies in current policies/practices

2. Design

1. Assess

3. Implement




Analysis


Evaluation



■ For each accounting gap, Identify incremental information requirements required for:

− New calculations

− New estimates

− New journal entries

− New disclosures

■ Evaluate each information requirement to determine how best to satisfy (automated process vs. manual process)

■ Identify current state process flows for revenue recognition, beginning with contract inception through finance close/ booking

■ Identify finance process gaps

2. Design

1. Assess

3. Implement




Analysis


Evaluation



■ Involve tax resources to determine impact on tax methods and areas where tax optimization strategy may need to be developed

■ Evaluate impact on internal controls

− Identify new risk points

− Make initial determination of whether automated or manual control would best address

■ Identify potential impact on IT

− Consider ERP vendor updates as well as bolt-on solutions – consider all options to determine how best to meet your unique needs

− Analyze current state and complete technical impact assessment, including identifying key risk areas for technology impacts

■ Consider impact on other areas of the company, including FP&A and investor relations.

■ Identify gaps and linkages across the organization

■ Documents: Final gap matrix and heat map, implementation roadmap

2. Design

1. Assess

3. Implement




Analysis



■ Determine how each option may impact your financials and business

■ Consider your ability to obtain needed information, particularly in historical periods

■ Evaluate impact on trends

■ Consider viability of operating dual set of books leading up to effective date

■ Think about whether consistency with peers or industry is important

2. Design

1. Assess

3. Implement


Evaluation


What Questions Do You Have?

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.. FOR INTERNAL USE ONLY The KPMG name and logo are registered trademark of KPMG International.

Food Labeling

The Vermont Food Labeling Law: Clear as Mud

PRESENTER BIOGRAPHY

Karin Moore Vice President and Chief of Staff, Government Affairs National Council of Farmer Cooperatives

Karin Moore is senior vice president and general counsel of the Grocery Manufacturers Association (GMA). Based in Washington, DC, GMA is the voice of more than 300 leading food, beverage, consumer product and affiliated companies that sustain and enhance the quality of life for hundreds of millions of people in the United States and around the globe. Founded in 1908, GMA is an active, vocal advocate for its member companies and a trusted source of information about the industry and the products consumers rely on and enjoy every day. As senior vice president and general counsel, Karin serves as a member of the GMA Senior Leadership Team. She directs the association’s federal and state litigation activity and provides legal counsel to the association and its staff on Board governance matters, antitrust, and a host of other issues.

Prior to joining GMA, Karin was the vice president and co-general counsel of the Wine & Spirits Wholesalers of America, where she advised on litigation and regulatory issues facing beverage alcohol wholesalers at both the state and federal levels. Before that, she was counsel with O’Melveny & Myers’ Antitrust and Criminal Defense practice groups, where she focused on antitrust litigation, civil and criminal antitrust investigations, and federal and state class action defense. Karin previously held a variety of positions with the U.S. Federal Trade Commission’s (FTC) Bureau of Competition, including counsel to the director and staff attorney. While at the FTC, Karin was selected to serve as a special assistant U.S. Attorney in the Eastern District of Virginia, where she conducted grand jury investigations and prosecuted criminal jury and bench trials.

Karin is an active member of the ABA Section of Antitrust Law and a member of the U.S. Chamber of Commerce’s Antitrust Council. Karin received her law degree in 1995 from George Mason University School of Law in Arlington, VA and her undergraduate degree in economics in 1989 from Hobart and William Smith Colleges in Geneva, NY where she is a member of the Alumnae Association Executive Committee.

Karin resides in Alexandria, VA with her husband, two children, two large dogs and a cat. In her spare time, she is a DJ with an avid local following of elementary age children, and studies Shaolin Kempo to perfect her mad ninja skills.

www.gmaonline.org

VERMONT GMO LABELING LAW: CLEAR AS MUD

February 12, 2016 KARIN MOORE

SVP & GENERAL COUNSEL GROCERY MANUFACTURERS ASSOCIATION

www.gmaonline.org

Combatting a Patchwork of State by State Labeling Laws

Overall • Federal Legislation • Oppose State Laws & Ballot Initiatives • Challenge What Passes Today • What’s So Wrong with a Patchwork? • State Landscape • Vermont Law and Litigation

AK

ME

NM

HI

OR

WA

ID

MT

WY

NV UT

AZ

CO

ND

SD

NE

KS

OK

TX

MN

IA

MO

AR

LA

WI

IL

MI

IN

OH

TN

MS AL

FL

GA SC

NC

WV

MD

DE

NJ PA

NH

VT

MA

Legislation Pending

As of 10/22/2015

2015 Biotech Food Labeling Activity

2015 Legislation Defeated, Withdrawn or Held

CA

Labeling Laws Enacted

CT RI

ME

www.gmaonline.org

2015 State Activity

• Big battles in Connecticut & Maine • Successful in New York & Rhode Island, as well as

Massachusetts & New Jersey • Nothing in California (!)

www.gmaonline.org

State GMO Labeling Laws

www.gmaonline.org

Complicating Factors • Nutrition Facts Panel 2016. • Determining which products to label. In VT, using “may be

partially produced” requires “reasonable inquiry.” • Regulations on the where, what, and how took

considerable time, by staff who are not familiar with food labeling laws.

• Private parties can sue. • Supply chain complexities, diversion. • Strict Liability: No intent required. • Private label products implicate retailers too.

www.gmaonline.org

But the States Promise To Work Together!

Every State’s Legislation Has Been Different: • Different definitions of what GE is • Different exemptions • Different thresholds for labeling (0 to .9%) • Different wording on the package • Different placement on the package • Different liability

www.gmaonline.org

www.gmaonline.org

Vermont Act 120 & Consumer Protection Rule 121

• Requires all “processed food” with GMO ingredients to label: – “Produced with genetic engineering,” “Partially

produced with genetic engineering,” or “May be produced with genetic engineering”

– Retailers not responsible for compliance • Bans “Natural” on foods with GMOs • $1,000 per day penalty per uniquely marked product • Holds manufacturer—not retailer—liable

9

www.gmaonline.org

Scope • Manufacturers label packaged

foods; retailers label unpackaged foods

• Applies to food that is • produced with genetic

engineering; • and offered for retail sale in VT

10

www.gmaonline.org

Exemptions

1. Animal products 2. Foods with USDA-approved labels 3. Sworn statement 4. Organic foods and foods certified as non-GMO by a

VT-approved organization 5. Processing aids 6. Foods with ≤ 0.9% GE content by weight 7. Foods for immediate consumption 8. Medical foods 9. Alcoholic beverages

11

www.gmaonline.org

Effective Date

• Applies to food distributed on or after July 1, 2016 • Distributed = sold or transported to retailer

• Packaged processed foods offered for sale before January 1, 2017 are presumed to have been distributed prior to July 1, 2016 and are not covered, unless there is evidence to the contrary

12

www.gmaonline.org

GMA, et al. v. Sorrell • Complaint filed on June 12, 2014 • Oral argument on PI/MTD Jan 7, 2015 • Decision on PI/Motion to Dismiss on

April 27, 2015 • 2nd Circuit Oral Argument on appeal of

PI denial was October 8, 2015 • Trial Ready- mid-April 2016

www.gmaonline.org

GMA, et al. v. Sorrell First Amendment GMO Labeling: Standard of Review: • Central Hudson or Zauderer? • And what exactly is the Zauderer

standard? Is it simply a rational basis test?

14

www.gmaonline.org

GMA, et al. v. Sorrell

First Amendment: Natural Ban • Flunks Central Hudson, per d.ct. • Circular definition: defines it using the

word. • Not inherently misleading because it

lacks a uniform, objective, and measurable meaning.

www.gmaonline.org

Questions?

Cooperative Tax Update


PRESENTER BIOGRAPHY

George Benson Partner McDermott, Will & Emery LLP George W. Benson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. George focuses his practice on federal income tax planning, tax controversy and tax litigation matters. George works with both public and private corporations (including S corporations), partnerships and limited liability companies and with individual taxpayers on a broad range of federal income tax issues. In addition, George has done considerable work for cooperative organizations of all kinds, both exempt and non-exempt, engaged in marketing agricultural products, wholesale distribution of products (such as farm supplies, hardware, groceries, office products and hospital supplies), manufacturing, transportation, providing credit and other financial services, electricity and housing. George has been particularly active in representing cooperatives involved in federal income tax controversies. He is a member of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives and of the Tax Committee of the National Society of Accountants for Cooperatives. He frequently writes and lectures on cooperative tax matters and is editor of the TAXFAX column in The Cooperative Accountant. George was recognized as one of the leading tax controversies lawyers in the United States in the 2011 edition of The Legal 500 United States. George is a member of the bars of the State of Illinois, the U.S. Tax Court, the U.S. Court of Federal Claims, the U.S. Court of Appeals for Federal Circuit and for the Seventh Circuit and the Supreme Court of the United States.

www.mwe.com

Boston Bruxelles Chicago Dallas Düsseldorf Francfort Houston Londres Los Angeles Miami Milan Munich New York Orange County Paris Rome Séoul Silicon Valley

Washington, D.C.

Alliance stratégique avec MWE China Law Offices (Shanghai) © 2016 McDermott Will & Emery. Les entités suivantes sont collectivement désignées "McDermott Will & Emery", "McDermott" ou "la Firme": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato et McDermott Will & Emery UK LLP. Ces entités coordonnent leurs activités via des contrats de prestations de services. McDermott bénéficie d'une alliance stratégique avec MWE China Law Offices, cabinet d'avocats distinct.


Annual Meeting of the LTA Committee of the National Council of Farmer Cooperatives

Phoenix – February 12, 2016

George W. Benson

Today’s agenda

I. Private letter rulings released during 2015.

II. 2015 legislative developments.

III. Section 199 developments – administrative, regulatory, pending cases.

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Private letter rulings

I. Private letter rulings released in 2015.

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A. Ltr. 201545001 (August 3, 2015) – handling antitrust settlement proceeds

A retailer-owned grocery coop sued producers of a commodity and related parties.

The coop alleged defendants’ conduct caused it to pay excessive prices over a period of years (the “litigation period”), harming members who purchased the commodity from the it for sale in their stores.

Expenses of pursuing the lawsuit were paid out of the net earnings of the coop, reducing patronage dividends of all members during the pendency of the litigation.

Ultimately, the defendants settled. The settlement proceeds did not exceed the alleged damages.

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Proposed treatment of the proceeds

The coop planned to treat the settlement proceeds as patronage-sourced.

The coop then proposed: – to allocate a portion of the proceeds to its general pool (to be

distributed as part of the patronage dividends of the general pool based on patronage for the year of the recovery), and

– to allocate the remainder to members who bought the affected products during the litigation period (to be distributed as a special patronage dividend based on their purchases of the products during the litigation period).

The ruling does not describe how the split was determined.

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The IRS concluded that:

The settlement proceeds are patronage-sourced. However, the portion allocable to business with nonmembers is taxable.

The proposed method of allocation of the settlement proceeds is proper. “The proposed allocation by Taxpayer’s board … represents the concerted effort of Taxpayer’s board to ensure that all members are treated fairly. The split of the settlement proceeds is necessary to be fair, based upon the historic treatment of prior and significantly smaller settlement receipts and the fact that the overall membership provided support to the litigation and the fact that the b Members disproportionately suffered from the price fixing that gave rise to the settlement proceeds.”

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One twist: bylaw amendment

In order for a payment to a patron to qualify as a patronage dividend, it must be paid “under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid.” Section 1388(a)(2).

The bylaws obligated the coop to distribute the settlement proceeds to its members, but did not provide sufficient flexibility to allow part to be allocated based on patronage in prior years.

So, after receiving the settlement proceeds, the coop amended its bylaws.

The ruling concluded that this late change did not jeopardize the coop’s pre-existing legal obligation. The IRS reasoned that the coop always had the obligation to distribute the settlement proceeds – the amendment just affected how the proceeds would be shared.

It is better to build flexibility into bylaws in advance so that an amendment is not required.

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B. Ltr. 201601004 (September 28, 2015) – partnership income is patronage-sourced

Two local coops and one regional coop entered into a grain marketing LLC (taxed as a partnership).

The LLC planned to engage in marketing the grain of members of the two local coops and others.

The local coops contributed their grain businesses to the LLC and the regional coop contributed other property. Each received a fixed percentage interest in the LLC.

One of the local coops asked whether its distributive share of income from the LLC attributable to grain marketing would be patronage-sourced.

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Partnership income is patronage-sourced

The ruling concluded that it would be patronage-sourced: “Taxpayer will be entering into LLC to allow it to better market grain for its members and participating patrons. Thus its participation in LLC will be directly related to and actually facilitate the accomplishment of what Taxpayer is organized to do on a patronage basis for its members.”

The ruling focused upon the relationship between the coop’s ownership interest in the LLC and its usage of the LLC:

“LLC will help Taxpayer market its members’ grain. Taxpayer anticipates that the percentage of the grain it will be supplying LLC (compared to all grain LLC markets) will exceed its fixed percentage ownership interest in the LLC. However, if its grain percentage for a year was materially less than its ownership percentage in LLC, then … a portion of its distributive share would be patronage-sourced and a portion would be nonpatronage. The portion that would be patronage-sourced would equal its grain percentage for the year divided by its ownership percentage. The remainder would be nonpatronage.”

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The ruling contains an example

This conclusion is consistent with prior rulings dealing with partnerships serving marketing coops, though prior rulings are not as explicit.

The ruling contains an example showing what would happen if the coop’s ownership interest exceeded its usage: – Assumptions: a coop’s ownership interest in a grain marketing LLC is

34%, and that it supplies 27.2% of the grain the LLC markets for a year.

– Result: for the year, 80% (i.e., 27.2% ÷ 34% = 80%) of the coop’s distributive share of LLC grain marketing income is patronage-sourced, and the remaining 20% is nonpatronage.

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C. Ltrs. 201529004 and 201536011 – handling patronage losses

Over the years, much attention has been given to how coops should treat losses. After much controversy, it has been established that coops have

significant flexibility (from a tax perspective). Nonexempt coops can: – Carry patronage losses back and over against patronage income. (The Code also

allows coops to relinquish the carryback period and simply carry losses over.) – Net patronage losses between allocation units (or choose not to do so). – Net (probably) nonmember/nonpatronage losses against patronage income (or

choose not to net). – Allocate losses to members and recover them by canceling equities or by offsetting

future patronage dividends. – In appropriate circumstances, simply cancel equities.

One area of continuing dispute is whether and when a nonexempt coop can use patronage losses against nonmember/nonpatronage income. Farm Service and Certified Grocers.

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Ltr. 201529004 (March 27, 2015)

Facts: a coop realized a large patronage capital loss on the sale of an interest in a patronage business. It wanted to pass the loss through to patrons by canceling pro rata a portion of a special class of qualified written notices of allocation which related to the business that gave rise to the loss.

Ruling: the IRS approved the loss allocation plan and ruled: “Charging the *** loss to members as provided in the Plan by cancelling special written notices of allocation will have no tax effect to Taxpayer other than the reduction of the tax loss incurred by reason of the sale of the interest in ***.”

Significance: first pass-through ruling involving a capital loss.

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Ltr. 201536011 (May 19, 2015)

Facts: a coop decided that it was most equitable to carry a large patronage loss forward to be recouped from future patronage income. However, the coop did not want to wait until the loss had been fully recouped before again paying patronage dividends.

Loss Recovery Plan: the coop proposed to retain a fixed amount of patronage earnings each year for a period of years, while paying out the remainder as patronage dividends (e.g., if the loss was $10 million, retaining $1 million a year for 10 years, distributing earnings in excess of $1 million each year as patronage dividends).

Ruling: the IRS approved the plan.

Significance: the ruling addresses the inter-play of the net operating loss carryover provisions and the patronage dividend deduction provisions of Subchapter T, reaffirming Rev. Rul. 65-106.

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Preparing for the possibility of a loss

Coops should not wait until they incur a loss to start thinking about handling losses. It is easier to establish a legal framework for handling losses in advance. The framework should provide flexibility.

The Articles of Incorporation or Bylaws of many coops expressly grant the Board broad authority to adopt a plan for dealing with losses, often listing examples of what the Board may decide to do. Coops that do not have something in place should consider adopting a loss provision.

Taxes are only part of the picture. Need to consider what can be done under applicable state law.

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D. Miscellaneous

Ltrs. 201507004, 201515012, 201524002, 201524004 and 201524004 – capital gains realized by telephone coops upon the sale of spectrum are patronage-sourced, notwithstanding the fact that the spectrum was never used in their patronage business (though each averred it planned to do so).

CCA 201511020 (November 13, 2014) – typical coop allocated equities should be treated as equity, not debt, for federal tax purposes.

Ltrs. 201524007 and 201602003 – a timber REIT’s status as a REIT for tax purpose is not jeopardized by patronage dividends received from a Farm Credit institution.

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Legislative developments

II. Significant 2015 legislative developments.

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A. Trade Preferences Extension Act of 2015 – penalties for information returns

To raise revenue to offset the cost of the Trade Preferences Extension Act of 2015, Congress increased penalties for failure to file (or to include all required information on) information returns. Effective for returns filed after 12/31/2015.

The basic penalty was $100 per return, capped at $1.5 million. Now it is $250 per return, capped at $3.0 million.

There is a similar penalty for payee statements.

Penalties can be significantly enhanced if the failure is intentional. $500 per return, or, if greater, a percentage (generally 10%) of the amount required to be reported, with no cap.

Lower penalties if gross receipts are below $5 million.

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B. Bipartisan Budget Act of 2015 – changes in rules for auditing partnerships

To raise revenue to offset the cost of the Bipartisan Budget Act of 2015, Congress scrapped the current TEFRA rules for audits of partners and partnership (including LLCs taxed as partnerships) and enacted new rules.

While there has been dissatisfaction with the TEFRA rules, the new provision took everybody by surprise.

It is not well thought out.

Fortunately, the new rules are generally first effective for tax returns filed for partnership taxable years beginning after December 31, 2017.

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Overview of new rules – electing out

The new rules will apply to all partnerships unless the partnership is eligible to elect out and an election is made. If an election out is made, any audit of issues related to a partnership will be conducted as part of the individual audits of the partners.

To be eligible to elect out, a partnership must have 100 or fewer partners, none of whom is a partnership. For S corporation partners, each shareholder counts as a partner.

– This is more liberal than the TEFRA rules, which do not apply to partnerships with 10 or fewer partners who are individuals, C corporations or estates.

– But the TEFRA rules do not require an election out.

The election out is an annual election made with the filing of the partnership return. While the new rules become effective in 2018, partnerships can elect out on returns filed after the date of enactment.

It is anticipated that eligible partnerships will generally elect out. 19

Partnership level audit

For partnerships that do not elect out, the audit will be conducted at the partnership level, much like an audit of a corporation.

When partnership adjustments are finally determined, there will be two options: – The default option is that the partnership will be liable for the resulting

tax as well as any interest and penalties.

– Partnerships are given the option to elect to push the adjustments out to the partners that were partners during the year or years under examination. If a push-out election is made, partners will be required to compute the additional tax they would have owed in prior years and report that tax plus any interest and penalties on their tax returns for the year they receive notice of the push-out adjustments.

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Practical implications

Practical questions: – What should be included in new partnership/LLC agreements?

– Should existing agreements be amended?

– Should partnerships that are currently covered by the TEFRA rules, but are eligible to elect out under the new rules, start electing out?

It is premature to answer these questions.

A coop’s approach to dealing with the new rules may depend upon whether or not it is in control of a partnership.

There likely will be significant legislative and/or regulatory developments before the rules become effective in 2018. The extenders legislative already tweaked the new rules.

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C. Protecting Americans from Tax Hikes Act of 2015 – extenders bill

In December, Congress enacted an extenders bill, which revived a number of provisions that had expired at the end of 2014.

Unlike the last extenders bill (and most extenders bills in prior years), some of the provisions were made permanent and others were extended for a year or more.

Nothing in the bill specifically affects cooperative taxation, but some provisions are of potential interest to coops and their members.

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Extenders bill – permanent items

Permanent extension of the R&D credit.

Permanent extension of Section 179 expensing limits at 2014 levels ($500,000, reduced by investment in excess of $2 million). The limits will be indexed for inflation after 2016.

Special rules for charitable contributions of food inventory are enhanced and made permanent.

The increased charitable contribution percentage limitations and carryforward period for qualified conservation easements (including those made by farmers and ranchers) are made permanent.

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Extenders bill – other items

Bonus depreciation is extended for five years, but at a decreasing rate – 50% for 2015, 2016 and 2015; 40% for 2018; and 30% for 2019. Bonus depreciation can be claimed for certain trees, vines and plants when planted or grafted, not when placed in service.

The new markets tax credit is extended through 2019 with $3.5 billion of credits authorized for each year.

The work opportunity tax credit is extended through 2019.

The biodiesel blender’s credit is extended through 2016.

The Affordable Care Act excise tax on high-dollar (“Cadillac”) health care plans is delayed for two years.

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Section 199 developments

III. Section 199 developments in 2015.

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A. Coops, partnerships and Section 199

CCA 20150801F (April 22, 2014) – a coop is not permitted to treat grain payments made by an LLC to the coop’s members as “deemed PURPIMs.” Thus, the coop could not add the deemed PURPIMs back in its DPAD computation.

The coop involved in the CCA has filed a petition in Tax Court. South Central FS, Inc. v. Commissioner, Tax Court Docket Nos. 15593-14 and 14131-15.

Ltr. 201601004 (September 28, 2015) – a coop that is a member of a grain marketing LLC can treat grain payments to members as PURPIMs. The IRS concluded that the coop continued to play a meaningful role in the origination process, buying the grain from members and reselling it to the LLC.

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B. Proposed amendments to the Section 199 regulations – released August 27, 2015

One proposed change is of direct interest to coops. – Treas. Reg. § 1.199-6 contains examples illustrating the application of

the special Section 199 rules for coops.

– The examples involve a marketing coop making crop payments to members.

– However, they do not treat the payments as PURPIMs, which is inconsistent with the IRS’ private letter rulings.

The proposed amendments add an example illustrating how the rules apply if the crop payments are PURPIMs.

This addition is positive, but raises other questions.

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Proposed amendments – contract manufacturing

Another proposed change relates to the treatment of contract manufacturing.

Some taxpayers depend upon the activities of contract manufacturers to meet the MPGE requirements. Typically, coops do not, but may involve others (e.g., co-packers) in bringing members’ products to market.

The IRS has had concerns with contract manufacturing arrangements, such as the possibility of double counting.

The proposed rule states that a taxpayer who hires a contract manufacturer “is not considered to have engaged in the MPGE of that QPP…” (i.e., the taxpayer’s sales do not qualify).

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NCFC criticizes the over-breadth of the proposed rule

This proposed rule is overbroad – it could cause a taxpayer whose own activities constitute MPGE to be unable to claim DPAD simply because it also uses the services of a contract manufacturer. Moreover, the contract manufacturer might not itself qualify for the DPAD.

NCFC comment letter (November 20, 2015): “The proposed rule should be revised to make it clear that entering into a contract with a contract manufacturer does not, in an of itself, preclude a taxpayer from having MPGE’d the finished product and claiming the section 199 deduction with respect to the sale of the finished product. A contrary conclusion does not make sense where a taxpayer otherwise would be regarding as having MPGE’d the product.”

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C. Pending Tax Court litigation

GROWMARK, Inc. v. Com., Tax Court Docket No. 23797-14. Issues: (i) must coops do two separate DPAD computations, one for patronage and one for nonpatronage; (ii) must DPAD be allocated between patronage and nonpatronage; (iii) if so, can patronage DPAD be used against nonpatronage income?

Ag Processing Inc a cooperative v. Com., Tax Court Docket No. 23479-14. Issues: (i) is a coop entitled to file amended returns characterizing grain and soybean payments as PURPIMs when it did not treat them in that manner on its original returns; (ii) also, the same issues as the GROWMARK case.

It likely will be several years before there is a decision in either of these cases.

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