We think the proposed regulations present a double bind to farmers and their families. First, a restrictive definition to material participation can discourage a decedent to be-I guess we are all decedents to be-and our heirs from engaging a nonfamily farm management specialist or firm to operate the farm.

Now, Mr. Chairman, I would like to go on to the last paragraph, but my time is up.

We believe, the Farm Bureau believes, that the Subcommittee of the Internal Revenue Service examination of regulations on imputed interest rates and special use valuation is justifiable.

All too often the role of the IRS is adversarial to the interest of taxpayers. The controversy and confusion surrounding the regulatory procedures with regard to these tax issues, reflect a need for the IRS to reexamine its role. Such reexamination is timely, given President Reagan's emphasis on regulatory reform.

The Farm Bureau supports a program for economic recovery outlined by the President. We hope that the regulatory procedures of the Internal Revenue Service will be modified to reflect more clearly the intent of Congress and the needs of the taxpayers. Mr. Chairman, I would like to have the whole testimony in the record if I could and we thank you for consideration of the Farm Bureau's comments.

Senator GRASSLEY. Your whole statement will be included.
Now, Mrs. Timmermann.

STATEMENT OF HELEN TIMMERMANN, CHAIRMAN, TAX COMMITTEE, NATIONAL ASSOCIATION OF WHEAT GROWERS Mrs. TIMMERMANN. Mr. Chairman and members of the committee, the National Association of Wheat Growers appreciates this opportunity to present its views on the Internal Revenue Service regulations for special use valuation of farmland for estate tax purposes.

I am Helen Timmermann of Pendleton, Oreg., wheat farmer and chairman of the National Association of Wheat Growers Committee on Taxation.

A special use valuation of agricultural lands for estate tax purposes was included in the Tax Reform Act of 1976. Section 2032(A)(e)(7) calls for a valuation procedure for valuing farm real property used for farming purposes based on the net rental returned to the lessor.

If you follow the procedure of 2032(A)(e)(7)(i) and subtract the annual real estate taxes from the annual gross cash rental, you arrive at the annual net return to the lessor.

This net return is then divided by the average annual effective interest rate for all new Federal Land Bank loans to provide the farm use valuation.

The appraisal procedure set forth in the IRS regulation, section 20.2032(A)-4 follows the procedure I just outlined, but only for one rental arrangement of farmland, a pure cash rent and excludes all others by definition.

In many areas of the country, such as dryland, summer fallow, crop rotation areas, few leases are written for cash rental, whereas all leases are convertible to cash.

The in-kind crop share rent converted to its cash equivalent is the cash rental of this land and becomes the net return to the owner when the annual real estate taxes are removed, just as the cash payment becomes the net return to the owner when the annual real estate taxes are removed.

Some leases, both cash and crop share, provide for certain shared expenses. Shared expenses must be subtracted as well as the real estate taxes to obtain the net rental return to the lessor.

It seems to me what is called for in the IRS code 2032(A)(e)(7) is the net annual rent; that is, the annual return to the asset to capitalize over the interest rate determined in the code to arrive at the use valuation.

The State of Oregon has developed a farm use appraisal method that determines the annual net rent for all agricultural lands regardless of leases.

Exhibits A-1 and A-2 are lease summary conversion sheets used for both cash and crop share to determine annual net rental to owner, which is then used to determine farm use valuation using the effective rate of interest charged in Oregon by the Federal Land Bank as an average over the past 5 years plus a component for the local tax rate.

Also included is exhibit A-3, pages 1 and 2, farm use information sheets, comparing crop share rent to cash rent.

Yield information may be obtained at the county USDA ASCS office. Local average and monthly average prices are available in every State on the major commodities from the USDA Economics and Statistics Service.

In exhibit B, when we look at the four farms, identical except for type of lease, we can see that under the current regulation only farm A is allowed valuation based on capitalization of the net rent return to the land. This results in extreme discrimination in valuation.

Farm B is allowed valuation under 2032(A)(e)(7) but not on net return. Farms C and D are disallowed under 2032(A)(e)(7) and would be forced to use 2032(A)(e)(8).

However, paragraph 8 also uses comparable sales which distorts the valuation away from the actual use valuation.

In my prepared statement, I list the regulations that prevent a fair and equitable valuation. It is interesting to note that proposed IRS regulations in volume 45 of the Federal Register, page 31042 issued on July 19, 1978, recognized the need for converting crop share to cash. This provision was then disallowed in the final regulations.

The goal stated in the summary in the Federal Register to provide "the method of valuing certain farm real property according to its actual use" cannot be attained while these arbitrary and discriminatory regulations remain.

Thank you.

Senator GRASSLEY. Thank you. Stay there please for possible questions.

Mr. Jones?

STATEMENT OF KENT JONES, COMMISSIONER OF

AGRICULTURE, STATE OF NORTH DAKOTA

Mr. JONES. Mr. Chairman, thank you for the opportunity to be here today. We have heard much rhetoric this afternoon about the demise of our farms. We know for example the number of farms has gone from 6.8 million down to 2.3 million. We are losing 30,000 farms each year now.

Ironically, this country was founded on the belief that each citizen is entitled to the right to have his own piece of land. The Federal Government still stands by that right, but its policies, such as the one you are considering here today, are making that an impossible dream.

North Dakota is having the same problem. We are losing our farms about the same percentage, I would imagine. We have gone from 85,000 to 40,000. The future of North Dakota's agricultural way of life is most seriously threatened by the inability of young people to take the place of farmers who are retiring.

Because North Dakota wants to have a healthy system of family farms and rural communities, we are fighting back and doing something on a State level.

The North Dakota Department of Agriculture has been researching the problems facing beginning farmers and has developed a number of programs to deal with the problems.

For example, our State, through the Bank of North Dakota has developed a beginning farmer loan program to provide low-cost financing for young farmers. The going rate is currently about 2 percent below the rate they can get elsewhere.

Our State legislature has instituted State income tax incentives for landowners to sell or rent farmland to beginning farmers.

A key feature of this program is a provision which exempts all principal and interest payments on an installment sale of a farm to a beginning farmer. The installment sale provision, or the contract for deed as it is commonly called in North Dakota, of our State beginning farmer program is why I felt compelled to travel here today to attend this hearing.

North Dakota is trying to provide the lowest rate of interest possible when a farm is sold to a beginning farmer. The IRS regulations under consideration, today, will offset a major portion of those benefits to young farmers which North Dakota has plugged in.

This past December my office sponsored a series of meetings. Out of those meetings came many of the same things we have heard today, with such statements as, What right does the Government have to tell me that I have to charge my son or daughter or a long time tenant 9-percent interest when I sell my farm on a contract for deed? They can hardly afford the present 6 percent.

Installment sales of farms are a common way of transferring a farm from one generation to the next. In many instances such transfers are being made so that they can have the lowest rate of interest allowed because a retiring farmer wants to be sure that the new generation, be they offspring or long time renter, on the farm has the best chance possible for making it on that farm. Increasing allowable rates of interest on such farm transfers will reduce the chance that such a new farm will survive.

Despite all these problems, many North Dakota young people want to farm. American agriculture would be better served by tax policies at the Federal level similar to the ones we have put into place to help beginning farmers in North Dakota, rather than additional tax obstacles making the transfer of family farms more difficult.

Now, we have all heard how hallowed the family farm is today. Everybody has referred to it. In addition to that it has done an amazing job of productivity. Unfortunately our institutions do not self-preserve.

We can control our destiny and that of American agriculture only if we set out to do so. I would hope that you would control the destiny of the family farm in the proper manner by doing everything in your power to make sure that the imputed interest rates on installment sales be left at the present level and not be increased as the IRS has proposed.

Federal tax laws seem designed to deliberately drive farmers and their families off of the land. The IRS regulation under consideration here today is as blatant an example as has come along in quite some time.

I want to thank you, Mr. Chairman and members of the committee for this opportunity to visit with you and I would hope that the entire testimony as presented to you, will be recorded.

Senator GRASSLEY. As long as that is your desire it will be printed in the record in total.

Mr. JONES. Thank you, sir.

Senator GRASSLEY. Now, I have questions of Mr. Kleckner and Mrs. Timmermann I feel silly calling you Mr. Kleckner. We have known each other so long, Dean, but I appreciate your coming out here and expressing your feelings to us.

I would like to ask both Dean and Mrs. Timmerman-you recommend permitting use of crop share rents in the 2032(A) formulas valuation method. What guidelines would you offer for converting crop share to cash amounts? Mrs. Timmerman, would you like to be first?

Mrs. TIMMERMANN. The guidelines should include the net rental return-whether cash, crop share, or other rental system-before the property taxes are removed, so that any kind of rental situation could be valued equitably.

As I stated earlier, the State of Oregon uses conversion sheets that convert crop share to cash, and I do not see why the same procedure could not be followed in other States. Oregon only removes the shared production expenses, not any individual ex

penses.

Senator GRASSLEY. OK. Dean?

Mr. KLECKNER. Mr. Chairman, I am not exactly sure if there would be any formula that you could work out that would be appropriate in every case.

It certainly can be done. All we ask is that you be reasonable. I guess I find it hard to believe that there are sections of the country where there isn't some cash rent and some crop share, albeit tipped one way or other in different sections of the country, where they could make valid comparisons.

The IRS, as I recall reading the regulations, lists 7 or 8 criteria. If you follow those it would make it nearly impossible. The topography of the land is one and the drainage and the buildings on the farm; you almost would have to have a clone of a farm to qualify under their rigs. It is not even reasonable.

All we would ask is that they make some reasonable assumptions and you could, I think, with some good judgment convert the crop share to a given figure and then use the formula.

Senator GRASSLEY. I want to assure you, Dean, because you made the point of whether we are going to push for broad based clarification of paragraph 482.

I think that the only question I would have about this general problem was the one that I had presented to the Commissioner. I guess I would ask you to comment if you have any particular understanding of the law that I don't have and tell me if it would be in opposition to the Commissioner.

They made the point to me that they interpret that Congress intended that they do, not making differentiation between the small family and small businesses and the major corporations. I think they are more or less saying that it is Congress responsibility to give that differentiation or direction to them.

Do you have any reading of the law that would be any different than that? I don't even want it to be implied that I agree with them. I am just accepting their judgment momentarily and sometimes you don't admit that Congress doesn't always spell out what it is intended in the past.

Do any of you have any comments on that point?

Mr. JONES. Well, this is a little different point, I guess, but I heard it over and over today and it certaily dovetails with how we felt in North Dakota with our struggling to have a beginning farmers program.

As soon as you raise that 6- to 9-percent minimum you are affecting it. I guess that doesn't matter what size farm, but it certainly is applicable on a beginning farm.

Senator GRASSLEY. Well, along that very line, when the interest rate was lower it wasn't so much of a problem. When you get the higher interest rates, primarily with the prospect that they could go much higher, then it really begins to impact upon some of the smaller concerns that do not have the ability to get capital independent of the family.

Mr. JONES. I guess what kind of bothers us is if we make all this effort in the State of North Dakota and back these loans by the State, pay the additional 2 percent by ourselves for the State pays it, and then lose it on the other end of the fence, that doesn't make an awful lot of sense.

Senator GRASSLEY. No. Dean?

Mr. KLECKNER. Mr. Chairman, I think you were right on target with your comments to those two gentlemen who led off the program.

I don't know what in law-you asked that point and I am not an attorney either-but it seems to me that in this case and other cases dealing with, for example, investment credit, all any person with any commonsense that worked for the Internal Revenue Service would have to do would be to read what Congress was saying in