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APPENDIX II

SELECTION OF STATES

APPENDIX II

We began our review by selecting States where we could review a sample of estate tax returns, interview heirs of estates, and interview farmers. We wanted a cross section of States that were representative of regional agriculture and farm activities. Criteria for selection included whether

--the State has a significant number of estates electing
special use valuation, section 2032A; and

--farming is a major industry in the State.

Based on these criteria, we selected five States. We then talked to U.S. Department of Agriculture and State Land-Grant College and University personnel and selected two counties in each State that represented farm activities for the region as well as the State. The States and counties selected were: California, Monterey and San Joaquin; Colorado, Logan and Kit Carson; Indiana, Wayne and Elkhart; Missouri, Chariton and New Madrid; Texas, Castro and Comanche.

SELECTION OF ESTATE CASES

Section 2032A

For our selected States we obtained a listing of all section 2032A estate cases from the applicable IRS District Offices when we visited them in November 1979. To ensure that the sample results could be used to provide estimates for the entire State, we either selected all section 2032A cases (in districts with smaller workloads) or we selected returns randomly (in larger districts). Using this approach, we selected 259 of 668 cases and completed a data collection instrument for each case.

Section 6166

At the district offices, we also tried to obtain a listing of farm estates with section 6166 elections in order to make a random selection of cases. Such a listing was not available at all locations; therefore, we selected a number of the available farm estates with the section 6166 election. At the five districts, we reviewed 30 farm estate cases where only section 6166 were elected. We also reviewed 36 cases where both sections 2032A and 6166 were elected.

SELECTION OF PEOPLE FOR INTERVIEWS

Farmers

We interviewed 105 farmers in our ten selected counties who met the following criteria:

1. Farm or ranch is a viable economic unit.

APPENDIX II

APPENDIX II

2. Value of the farm or ranch is generally in the range of $300,000 to $800,000 in assets.

3.

Farm or ranch is owner-operated.

4. Farm operation represents regional or State farming.

These farmers were not selected randomly. We obtained names from the USDA county officials and talked to those willing to answer our questions.

Electing heirs

From the estate case files we identified individuals who received an interest in section 2032A, or section 6166 property, or both and tried to interview one heir per case. We interviewed 276 heirs who had elected section 2032A, section 6166 provision, or both.

Non-electing heirs

We interviewed 54 heirs who inherited farmland in 1976 or earlier and 55 heirs who inherited farmland after January 1, 1977, who did not elect the provisions. These heirs were not selected randomly. We obtained names from the USDA county officials or from county probate records and talked to those willing to answer our questions.

LIMITATION ON CASE STUDY APPROACH

We obtained some of our data using random selection techniques (scientific or statistical sampling). Data obtained by using a scientific sampling plan permitted us to draw conclusions about the sample population. The following surveys were based on a scientific sampling plan: selection of section 2032A estate cases at the IRS District Offices; selection of the nationwide sample of estate returns using section 2032A; selection of ASCS County Executive Directors; and selection of estate attorneys.

Data not obtained by a scientific sampling plan represent a qualitative case study and any interpretations are restricted to the particular locations or individual circumstances examined. The following surveys were case studies: selection of section 6166 cases, selection of electing farm heirs, selection of non-electing heirs, and selection of farmers.

METHODS OF ANALYSIS

Because the quantitative and qualitative information involved was diverse, we used a range of analytical methods. For example, from the statistical sample of estate tax returns we were able to develop a detailed profile of the estates and the tax saving. In other instances, such as the interviews conducted with farmers, the data collection effort was aimed at developing

APPENDIX II

APPENDIX II

reliable background information. This background enabled us to develop case studies for the 10 counties listed earlier.

Data obtained from the nationwide sample of estate tax returns were analyzed to estimate the size of the total revenue loss due to section 2032A, a "profile" of the average farm estate electing section 2032A, and the distribution of the tax savings. The estimated annual revenue loss was calculated as the product of the mean tax saving and the annual number of returns.

The profile of estate tax returns containing section 2032A elections (see table 2) was compiled using mean (average) values of the variables on the table (total gross estate, taxable estate, etc.). Estate shares (e.g., liquid assets) are based on sample means.

Finally, the sample estates were grouped by estate size to estimate the distribution of the tax losses (table 3). The apparent link between increasing estate size and a larger average tax saving was supported by finding that the correlation between the fair market value of the taxable estate and the tax saving was 0.76. (A 0.59 correlation was observed between the special use value of the taxable estate and the size of the tax saving.) While the correlation coefficients alone do not prove a direct causal relationship between the size of estate and the tax saving, they are consistent with the observations reported in the report's text and with our expectations.

ASCS County Executive Director and estate attorney questionnaires were tabulated to determine the respondents' opinions on how effective estate planning by farmers has been and how effective sections 2032A and 6166 would be in encouraging continuation of family farms.

The remaining questionnaires were not analyzed in as much detail. While the estate tax returns collected at IRS district offices constituted either a full count of all returns in the district or a valid sample of the returns, 1/ we did not rely on them for any part of this study except for the State case studies. (See appendix III for these studies.) We did compare the national sample of returns with these district office returns; no significant differences were observable. Other questionnaires were used to gather background information for qualitative case studies rather than quantitative analysis.

All calculations were performed with the Statistical Package for the Social Sciences (SPSS). Since this is a commonly used statistical software package, we did not test any of the calculation methods.

1/The decision to sample or collect data for all returns was based on the number of returns at the IRS district office.

APPENDIX III

FARM STATES AND COUNTIES REVIEWED

APPENDIX III

CALIFORNIA

Farm products

California is the leading farm State in the country with nearly 10 percent of the Nation's cash receipts from only 3 percent of the Nation's farms. Its agriculture is unique in that farms produce a wide range of crops with no single dominating commodity. The major agricultural products in terms of dollars were cattle and calves, followed by milk and cream, cotton, and grapes and hay. The combined acreage of principal crops in 1979 totaled 9.4 million acres with 49.2 million tons of harvested farm production.

Farm income

The average California farm was estimated at 538 acres in 1979 and valued at $503,900, including buildings. Gross cash receipts from farm marketing for 1979 totaled $12.1 billion. Land transfers and values

California, which is the third largest State in the continental U.S. with a land area of 100.2 million acres, had an estimated 32.8 million acres in farms in 1978. Sixty-two thousand farms in the State have annual sales of agricultural products of $1,000 or more. The State average value per acre as of February, 1980 was $1,123. The average value of land per acre for nonirrigated land ranges from $320 for rangeland to $1,210 in the San Joaquin Valley for cropland in 1980. Irrigated land ranges from $1,000 for pasture to $4,900 for truck and vegetables in the Central Coast area, which includes northern Monterey County. Special crop acreage draws as high as $17,200 for avocados and $11,900 for lemons.

The average farm size increased from 454 acres in 1969 to 493 acres in 1974, according to the 1974 Census of Agriculture. Also the number of farms decreased significantly during this period. It is generally agreed that the trend is toward fewer and larger farms. According to the USDA Landownership Survey of 1978, over 75 percent of the farm acreage in California is owned by sole proprietors or family businesses.

Farmland leasing practices

The 1974 Census of Agriculture reports that 18.1 million acres of farmland were leased and about 15.3 million acres were owner-operated. In a recent study of 211 large-scale farm opera

APPENDIX III

APPENDIX III

tors in California, 1/ it was found that four out of five of the operators lease land and those leasing land lease about 50 percent of the land they farm. By dropping or adding leases, the farm

size changes rapidly. Because cropland in California is very expensive and mortgage loan interest rates are at high levels, leasing is perhaps the most expeditious method for rapid farm expansion.

GAO county level

work in California

Farms located in Monterey and San Joaquin Counties were selected for our interview work. We selected these counties because the agriculture and ownership is diverse.

In terms of farm income for 1979 Monterey ranks eighth out of 30 counties. In terms of land value it was fourth in 1978. Farmers here do well compared to others in the rest of the State. Farming has the highest use value for land in the county except in small areas around towns and recreation areas located in the southern part of the county. The farmers have to be aggressive to make a profit: farm debt is high, farms are irrigated, crops are diversified and rotated, and farms are worked year round. The vast majority of the farms raise vegetables with lettuce as a major crop.

According to the 1978 Census of Agriculture, the average farm in Monterey County is over 1,100 acres and the value of the land and buildings is well over $1,000,000.

San Joaquin County has approximately 4,100 farm operators and farm size averages 200 acres; however, over half the farms in the county are under 50 acres. Their value is under $250,000 and annual income is under $20,000. Farmland values in the county have a built-in speculative value. As a result, a farmer cannot economically buy land for agricultural purposes in comparison to Monterey County where very few farm sales or conversions to nonfarm use occur. Most farms in Monterey County are acquired by inheritance.

San Joaquin County agriculture is more diverse than Monterey's, no one crop predominates; the majority of farm products are fruits, nuts, vegetables, field crops, and dairy products. Monterey County, California

Monterey County, located in the central coast area of California known as the Salinas Valley, is among the top counties in

1/Don Villarejo, Getting Bigger: Large Scale Farming in California, California Institute for Rural Studies, Inc. (Davis, Calif., 1980), pp. 10-11.

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