GRAPH 2. INTEREST -8 The impact of an increasing inflation rate and interest rate on the cash flow deficit inherent in a farm land purchase. -10 Table 1. 30-year net cash flows per acre on $2,400 land expected to net $85 the first year and 7 percent more each year thereafter. Senator GRASSLEY. Now I would like to call a panel consisting of Dean Kleckner, president of the Iowa Farm Bureau Federation, representing the American Farm Bureau Federation, Mrs. Helen Timmerman, chairman of the tax committee, the National Association of Wheat Growers and Mr. Kent Jones, commissioner of agriculture, the State of North Dakota. In way of apology, but also admitting that I did not plan ahead adequately and you have seen the chart that is spelled out plan ahead with going down the side of the paper the last letters of the words plan ahead. In that vein, we are running short of time, but not so much time that you won't be given what we should have limited everybody to-the 5 minutes per person. We would like to then have you summarize your statement and use your 5 minutes of time. You all know that your statement will be printed in total in the record if that is the way you wish to have it done. I would ask then, that we would start-say did I miss somebody? Dean, would you please start? STATEMENT OF DEAN KLECKNER, PRESIDENT, IOWA FARM BUREAU FEDERATION Mr. KLECKNER. Thank you, Mr. Chairman. I am Dean Kleckner, president of Iowa Farm Bureau Federation, representing the American Farm Bureau. I am a farmer from Iowa. Mr. Chairman, I will attempt to summarize our statement to some degree. I recognize the lights up there. I know what they mean. We do appreciate the opportunity to be here to talk about these two areas of imputed interest rates and special use valuation for farmland. We commend you for your examination of the IRS regulatory practices. Imputed interest rates and special use valuation have generated much discussion among our members. This tax policy has significant effect on the economic well-being of Farm Bureau member families who now number over 3 million member families in 48 States and Puerto Rico. Now, concerning imputed interest, as we have heard today, under current law a portion of each deferred payment is required to be treated as ordinary interest income. We testified before IRS in January of this year regarding the proposed regulations that would increase these interest rates and this is part of what we said as we testified to IRS. We are concerned that the proposed regulations discriminate against related party transactions. That has been pointed out earlier this afternoon. We don't think it is clear yet whether family farms are affected by section 482. Mr. Chairman, you tried to get the IRS Commissioner to explain and I am not sure exactly how he answered you and I listened. So, we don't really know yet whether family farms are affected. If the purpose of the rules is to prevent sweetheart deals between financially related entities such as parent corporations and their subsidiaries, we think the proposed regulation should be clarified to reflect that purpose. We don't think that we ought to arbitrarily apply the increased interest to family farms and other small businesses. That position unfairly hampers and may prevent, in some cases, the transfer of family businesses from one generation to another. Transactions should not be suspect simply because they occur between related parties. We are concerned, though, that a pattern is being established which reflects this thought. An example that we know of is an IRS proposed regulation on the deductibility of normal business expenses for a taxpayer who rents a dwelling to a family member as compared to somebody who is not a member of the family. We list here a number of bills that the Congress has introduced designed to prohibit the IRS from doing this. That signifies Congress' interest in another bill H.R. 837 providing that regulatory increases in the interest rate shall not apply to farms and other small business. The Farm Bureau opposes the efforts of the IRS to increase imputed interest rates. The rules are vague at best, and offer no guidance as to whether family farms are affected. Furthermore, the discriminatory application of the rate regarding related/unrelated party transactions appear likely. To increase the interest rates on a type of sales arrangement, frequently used in the intergenerational transfer of farming operations between family members will serve to prohibit some transfers entirely. Lower interest rates and a loan or installment sales transaction between family members is not an effort to avoid income taxes. It is a traditionally recognized method of continuing family businesses. I think the previous witnesses pointed that out for their States. It is certainly true in Iowa and much of the Midwest that I am familiar with. It is presumptuous of the IRS to attempt to substitute its business judgment through the proposed regulations for that of a farmer. By removing a farmers or business owners flexibility to set interest rates, the IRS assumes that legitimate transfers are efforts to avoid income taxes. We reject this notion and therefore, oppose proposed regulatory increases in sections 482 and 483. I see I am not going to get through. That concludes my statement. Senator GRASSLEY. You have another minute until the red light comes on. Mr. KLECKNER. I can't go much faster. You wouldn't understand it, Mr. Chairman. The special use valuation, we have a section on that, lists our policy. I would like to point out down there just two of those areas. I think the fourth paragraph under our policy explains it. We believe both crop share and cash rentals should qualify in determining the special use valuation of farmland under section 2032(A). In the next one, we encourage a reasonable and flexible intrepretation by the Internal Revenue Service of the material participation requirements for this special use valuation. I think I best go on to the next to the last page under some previous testimony. |