BEFORE THE Department of REVENUE
OF THE STATE OF MONTANA
In the matter of the adoption of New Rules I through III, the amendment of ARM 42.20.102, 42.20.106, 42.20.118, 42.20.156, 42.20.173, 42.20.302, 42.20.454, 42.20.455, 42.20.501, 42.20.502, 42.20.503, 42.20.504, 42.20.509, 42.20.515, 42.20.601, 42.20.603, 42.20.604, 42.20.606, 42.20.620, 42.20.660, 42.20.665, 42.20.670, 42.20.675, 42.20.680, 42.20.705, 42.20.720, 42.20.725, 42.20.730, 42.20.735, 42.20.740, and 42.20.745, and the repeal of ARM 42.20.605, 42.20.607, and 42.20.625 pertaining to the valuation and classification of real property
NOTICE OF ADOPTION, AMENDMENT, AND REPEAL
TO: All Concerned Persons
1. On October 23, 2014, the Department of Revenue published MAR Notice No. 42-2-924 pertaining to the public hearing on the proposed adoption, amendment, and repeal of the above-stated rules at page 2612 of the 2014 Montana Administrative Register, Issue Number 20.
2. On November 12, 2014, a public hearing was held to consider the proposed adoption, amendment, and repeal. Robert Story, President of the Montana Taxpayers Association (Montax), and Glenn Marx, Executive Director of the Montana Association of Land Trusts (MALT), appeared and testified at the hearing. Montax and MALT also provided written comments.
3. The department has adopted New Rule I (42.20.681), II (42.20.682), and III (42.20.683), amended ARM 42.20.102, 42.20.106, 42.20.118, 42.20.173, 42.20.302, 42.20.454, 42.20.455, 42.20.501, 42.20.502, 42.20.503, 42.20.504, 42.20.509, 42.20.515, 42.20.603, 42.20.660, 42.20.665, 42.20.670, 42.20.675, 42.20.680, 42.20.705, 42.20.720, 42.20.725, 42.20.730, 42.20.735, 42.20.740, and 42.20.745, and repealed ARM 42.20.605, 42.20.607, and 42.20.625 as proposed.
4. Based upon the comments received and after further review, the department has amended the following rules as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:
42.20.156 AGRICULTURAL AND FOREST LAND USE CHANGE CRITERIA
(1) The department will change the classification and valuation of land from class three, as defined in 15-6-133, MCA, or class ten, as defined in 15-6-143, MCA, to class four, as defined in 15-6-134, MCA, when any of the following criteria are met:
the agricultural land does not meet the eligibility requirements in 15-7-202, MCA restrictive covenants, easements, deed restrictions, servitudes, conservation easements, or other legal encumbrances that exist and when enforced effectively prohibit agricultural use of the land;
(b) through (3) remain as proposed.
42.20.601 DEFINITIONS The following definitions apply to this subchapter:
(1) through (8) remain as proposed.
(9) "Classification" is the agricultural use of the land. The department classifies agricultural land into one of five agricultural use classes. The department's five agricultural uses are described in ARM 42.20.660 through 42.20.680.
(10) through (13) remain as proposed.
(14) "Effectively prohibit" means to result in the permanent cessation of a bona fide agricultural operation.
(14) remains as proposed, but is renumbered (15).
(15)(16) "Income from agricultural production" means the gross amount of income received from the sale of food, feed, fiber commodities, livestock, poultry, bees, biological control insects, fruits, vegetables, and also includes sod, ornamental, nursery, and horticultural crops that are raised, grown, or produced for commercial purposes, income from farm rental, the sale of draft, breeding, dairy, or sporting livestock, the share of partnership or family corporation gross income received from a farming or ranching business entity, or the taxpayer's share of distributable income from an estate or trust involved in an agricultural business. When the income from agricultural production is used to qualify land for agricultural classification, it must be reportable income for income tax purposes.
(a) remains as proposed.
(b) A bona fide agricultural operation may combine the income of more than one parcel to meet the income requirements. The parcels must be dependent upon each other in the agricultural operation as a whole.
For example, one parcel may be used to grow hay, which is fed to livestock raised on a different parcel.
(16) through (34) remain as proposed, but are renumbered (17) through (35).
42.20.604 STEPS IN DETERMINING THE PRODUCTIVITY OF AGRICULTURAL LAND (1) through (2)(d) remain as proposed.
(e) for nonirrigated hay land, the midpoint production of the amount of air-dry herbage grown between "unfavorable" condition years and "normal' condition years divided by 2,000 pounds is used to determine the land's productivity in tons per acre.
42.20.606 EXCEPTIONS TO AGRICULTURAL LAND ASSESSMENT
(1) and (1)(a) remain as proposed.
(b) land that has restrictive covenants, easements, deed restrictions, servitudes, conservations easements, or other legal encumbrances that when enforced effectively prohibit agricultural use;
(b) and (c) remain as proposed, but are renumbered (c) and (d).
(2) remains as proposed.
42.20.620 CRITERIA FOR AGRICULTURAL LAND VALUATION FOR LAND TOTALING LESS THAN 160 ACRES (1) through (10) remain as proposed.
Land used solely for summer Summer fallow farmland must produce a minimum of $1,500 in agricultural crop income every other growing season in the year it is farmed to be valued as agricultural land.
(12) through (15) remain as proposed.
5. Based upon comments received and for consistency within the rules, the department is also amending ARM 42.20.640, which was not originally proposed to be amended, as shown below, new matter underlined, deleted matter interlined:
42.20.640 VALUATION OF LAND OWNERSHIPS 160 ACRES OR LARGER IN SIZE (1) and (2) remain the same.
(3) Any remaining acreage in the ownership parcel will be classified and assessed as agricultural land provided the land is not used for residential, commercial, or industrial purposes, and that the land doesn't have stated restrictive covenants, easements, deed restrictions, servitudes, conservations easements, or other
restrictions legal encumbrances that when enforced effectively prohibit agricultural use. If the remaining acreage in the ownership parcel is either used for residential, commercial, or industrial purposes, or has stated covenants or other restrictions that effectively prohibit agricultural use, the remaining acreage will be classified and valued as class 4 land.
(4) and (5) remain the same.
AUTH: 15-1-201, MCA
IMP: 15-6-133, 15-7-201, 15-7-202, MCA
6. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:
COMMENT 1: Regarding the proposed adoption of New Rules I and II, the department received the following comments from Robert Story, President of the Montana Taxpayers Association (Montax).
Mr. Story commented that New Rule I, containing the prices and values used in the 2015 cycle, basically brings all the price and yield information for class three ag land into one rule, which is a good move. It makes it easy to find and will simplify the process. Montax thinks going to a ten year Olympic average will give a better average of commodity prices than the seven year average and consolidating this information in one rule will simplify the process.
Mr. Story further commented that New Rule II, which describes a family farm and deals with parcels between 20 and 160 acres, originally caused concern but after discussions with department staff, he understood that this rule is basically statutory language and a consolidation of old rules.
RESPONSE 1: The department appreciates Mr. Story's comments. New Rule I reorganizes several rules into one rule to allow the department to more easily update price and yield information in subsequent reappraisal cycles. Additionally, the expansion of the years in calculating the Olympic average mitigates increases and decreases in commodity prices. Reorganizing the rules pertaining to family farms seeks to decrease taxpayer confusion and to make the rules easier to understand.
COMMENT 2: Regarding the proposed amendments to ARM 42.20.156, the department received written comments from Andy Baur, President, Board of Directors, Montana Association of Land Trusts (MALT).
Mr. Baur proposes to amend the department's reasonable necessity to include the following sentence, "The department will determine the classification of agricultural land based upon the use of the land and not upon the terms of covenants, easements, deed restrictions, servitudes, conservation easements, and other land-use restrictions."
RESPONSE 2: The department appreciates Mr. Baur's suggestion, but is unable to revise a statement of reasonable necessity in a proposal notice that has already been published. However, including his suggested language in the comment section of this adoption notice incorporates it into the record for the rulemaking action.
COMMENT 3: Regarding the proposed amendments to ARM 42.20.502, Mr. Story commented that the value before reappraisal (VBR) section of the rule, which is updating dates, was of great concern for the Farm Bureau in the last reappraisal cycle. However, the department has issued a new rule notice governing VBR which the Farm Bureau appreciates. Mr. Story stated that they look forward to working with the department on a subsequent notice of amendment to the VBR rule that may work better for class three properties.
RESPONSE 3: Mr. Story is correct. The changes in ARM 42.20.502 are updates in preparation for the upcoming reappraisal cycle. The department welcomes Mr. Story's testimony and/or comments regarding the proposed and pending new VBR rule.
COMMENT 4: Regarding the proposed amendments to ARM 42.20.504, Mr. Story is concerned with the broad new language in (1)(e) pertaining to new construction. The department eliminated two fairly minor changes to property and replaced them with a very broad statement and that could be problematic. There is a catch-all phrase in (1)(e) that states properties with physical change will be treated as new construction. Montax is concerned that a very minor physical change could be considered new construction that would result in a revaluation of the property.
Mr. Story stated that he understands the department needs a way to deal with changes to property; however, this leaves a lot of discretion for an appraiser to consider something new construction which will create a new value. Mr. Story further stated that while other groups under (1) are easily identifiable, (e) is subject to an appraiser's interpretation, which may result in many appeals. The elimination of the 100 square foot exemption may result in having small changes in a property causing a revaluation. One hundred square feet may be too large of a number, but there should be some allowance for small changes that probably do not make much difference in the value of a property. Mr. Story indicated he would be interested in learning the department's reasoning for going this route.
RESPONSE 4: The department thanks Mr. Story for his comments. ARM 42.20.505(1)(e) limits new construction to square footage only. Square footage is not the only type of physical change that may occur. Section (1)(g) recognizes finished basements as new construction only. Finished basements may be destruction as well as new construction. Because of these reasons, the department struck both subsections. Physical changes are not appraiser judgment but rather actual changes to the property. The impact on the property's value is dependent upon the type of physical change.
COMMENT 5: Regarding the proposed amendment to ARM 42.20.601(13), Mr. Baur commented that the department should revise, not remove, the statutory term "effectively prohibit" from the definitions. Mr. Baur stated that the purpose of MALT's comments is to seek clearer administrative rules interpreting 15-7-202(5), MCA, particularly with respect to properties protected by perpetual conservation easements pursuant to 76-6-101, MCA. Land may not be classified or valued as agricultural land or nonqualified agricultural land if it has stated covenants or other restrictions that effectively prohibit its use for agricultural purposes. Despite this clear statutory language, the department's proposed rules and statements of reasonable necessity indicate that the department plans to strike the definition of "effectively prohibit" and delete such references in ARM 42.20.156 and ARM 42.20.606 in response to a recent Montana Supreme Court case.
Mr. Baur proposes the following definition as a replacement for the current definition found at ARM 42.20.601(13): "Effectively prohibit" means that a complete cessation of all farming, ranching, grazing, or other agricultural activities on the land is required by the stated covenants or other restrictions and that the taxpayer's compliance with the covenants or other restrictions has actually brought about the complete cessation of agricultural use of the land in its entirety. "Effectively prohibit" does not include the temporary cessation of agricultural production (a) for land management purposes; (b) to improve the land's productivity; (c) to follow a farming, ranching, grazing, or other agricultural plan that includes taking land temporarily out of production; or (d) pursuant to any other practice that is not intended to permanently remove the land from farming, ranching, grazing, or other agricultural activities.
Mr. Baur further stated that in a recent case, the Montana Supreme Court was asked to interpret the statutory phrase "effectively prohibit" in 15-7-202(5), MCA, as applied to a residential subdivision's restrictive covenant that prohibited agricultural activities. In its opinion, the Court emphasized that lands must be classified and valued based upon their actual uses rather than according to the language of restrictive covenants attached to the land, particularly in instances where restrictive covenants are not enforced or where the covenants have not brought about an actual cessation of the agricultural use of the land.
Mr. Baur stated that, in part, the opinion looked to 15-7-103(2), MCA, which provides that all lands must be classified according to their use or uses. In addition, the Court looked to the District Court's definition of "effectively prohibit," which was to "forbid an action in a way that accomplishes the purpose and brings about the expected result." The Court's ultimate analysis appears to combine these two concepts. It focused on the actual use of the land and whether the restrictive covenants were actually effective at bringing about a total cessation of the agricultural use of the land. The Court refused to constrain its analysis by focusing on the written language of the restrictive covenants, including whether those provisions were legally sufficient to effectively prohibit agricultural use. Ultimately, the Supreme Court concluded that the continued actual use of the land for hay and grain production belies any claim that the covenants effectively prohibit agricultural purposes.
Mr. Baur further stated that, as noted above, the department's proposed rule changes would strike the use of the term "effectively prohibit," including its definition, from the administrative rules implementing 15-7-202(5), MCA. MALT agrees with the department that the current rules implementing the term "effectively prohibit" should be revised in response to the Supreme Court case. However, because 15-7-202(5), MCA, will remain current law following this rulemaking, MALT disagrees with the department's proposal to remove the explanation of how it will administer the statutory term "effectively prohibit." The Supreme Court did not remove this term from Montana law. The department and the public are best served if the ARMs continue to provide a functional definition of the term.
Mr. Baur recommends the department: (1) adopt a new rule implementing 15-7-202(5), MCA, defining permanent and temporary cessations of farming, ranching, grazing, or other agricultural activities and when these activities result in a land reclassification; (2) adopt a new definition of "effectively prohibit" in ARM 42.20.601(13), as opposed to striking the language; and (3) revise language in ARM 42.20.640 for consistency.
RESPONSE 5: The department agrees with Mr. Baur's comments to the extent that a revised definition of the term "effectively prohibit" provides better direction to the public rather than striking the language altogether. In response to Mr. Baur's comments and suggestions, the department is further amending the language in ARM 42.20.156, 42.20.601, and 42.20.606, and adding ARM 42.20.640 to this adoption notice to also amend it for consistency.
COMMENT 6: Regarding the proposed amendment to ARM 42.20.601(15), Mr. Story commented that he has a concern with the proposed definition example in ARM 42.20.601(15)(b). He stated that the definition is fine, but the example is very narrow and asked if parcels used to produce cash crops would be excluded under this example. Parcel dependence may only be related to creating an economic size for the operation.
Mr. Story stated that he is concerned that there may be no direct connection as provided in the example causing a decision maker to disallow the aggregation. Parcels may be interdependent as far as the operation goes, but don't have that direct link. The operator may be cash cropping all of them and the only interdependence is that they are helping to become an economic unit. Either the example or the language should indicate that.
Mr. Story further commented that he thinks the department already does that, but if the test becomes the need to be a direct vector between the two of them, such as raising crops and feeding it to livestock, the result may be that parcels operated by a bona fide agricultural operator cannot be aggregated. Mr. Story stated that he thinks the department's intent is good, but how it is carried out may be a problem.
RESPONSE 6: The department appreciates Mr. Story's insight and agrees that the example may be narrowly construed. The department is striking the example from the new definition.
COMMENT 7: Regarding the proposed amendments to ARM 42.20.603, Mr. Story commented that he agrees with the changes that attempt to treat owners of lands that do not have a published survey more fairly.
RESPONSE 7: The department agrees. The proposed changes more fairly consider the data that is provided to the department in valuing agricultural land.
COMMENT 8: Regarding the proposed amendments to ARM 42.20.604, Mr. Story stated that he agrees with the proposed amendments, but thinks (2)(e) could be worded better to make it more understandable. He commented that with regard to the statement "nonirrigated hay land, the production of the amount of air-dry herbage grown between unfavorable condition years and normal condition years divided by 2,000," that he doesn't know what that number is. Do you use the average of unfavorable and normal? Mr. Story commented that in committee discussions there was a chart with ranges on it to pick the mid-point between the two, but in the rule it's hard to understand where to find the number and what it actually is. Hopefully the department can clarify that and get it to an understandable description of whether you are using an unfavorable, or normal, or something mid-point between those two.
RESPONSE 8: The department appreciates Mr. Story's observation and agrees with the confusion in that section of the rule. The department is further amending the ARM 42.20.604(2)(e) for better clarity.
COMMENT 9: Regarding the proposed amendments to ARM 42.20.606, Mr. Baur proposes the department change its reasonable necessity statement to include the following sentence, "The department will determine the classification of agricultural land based upon the use of the land and not upon the terms of covenants, easements, deed restrictions, servitudes, conservation easements, and other land-use restrictions."
RESPONSE 9: The department appreciates Mr. Baur's suggestion, but is unable to revise a statement of reasonable necessity in a proposal notice that has already been published. However, including his suggested language in the comment section of this adoption notice incorporates it into the record for the rulemaking action.
COMMENT 10: Regarding the proposed amendments to ARM 42.20.620, Mr. Story commented that the language in the department's proposed changes to (11) could be problematic even though the department's intent is right. It says "land used solely for summer fallow must produce a minimum of $1,500 in income every other year." That should be $1,500 in a two-year period. It's the same number but it's more achievable. The way this is worded, the only way you could actually qualify is to farm the whole block one year and summer fallow the whole block the next year and that might not be feasible.
RESPONSE 10: The department appreciates Mr. Story's comments. Statutory law requires the land to produce $1,500 in annual gross income for agricultural land classification. Summer fallow farm land is a crop grown every other year with no vegetative growth in idle years. The proposed changes would allow summer fallow farm land to qualify for agricultural land classification if the $1,500 in gross income was produced in the year it was farmed, even though the following year it may lay fallow. The department is further amending ARM 42.20.620 to make this clear.
/s/ Laurie Logan /s/ Mike Kadas
Laurie Logan Mike Kadas
Rule Reviewer Director of Revenue
Certified to the Secretary of State December 1, 2014.