In January 1980, Doyle Rahjes, Vice President of the Kansas Farm Bureau, presented Farm Bureau's position at the Internal Revenue Service hearing on the definition of gross cash rentals for purposes of the special use valuation of farmland. The definition of gross cash rentals included in the proposed regulations published on July 19, 1978, permitted crop share rentals if no actual cash rentals of comparable real property were available in the locality. The option to substitute crop share figures for cash rent figures is essential in areas of the country where rental operations are conducted primarily under crop share arrangements, a traditionally recognized way of conducting business. Unfortunately, proposed regulations published in September 10, 1979, withdrew this option to farmers and ranchers. In areas of the country where crop share arrangements predominate, such as Kansas and Illinois, it has become impossible to take advantage of the special use valuation under 2032A (e) (7). This leaves the alternative of a more cumbersome valuation procedure under 2032A(e) (8). Mr. Rahjes emphasized the importance of crop shares to farmers and urged the Internal Revenue Service to reexamine its decision to eliminate the use of crop share rentals. In a hearing on March 4, 1980, before the Senate Finance Subcommittee on Taxation and Debt Management, Farm Bureau's position was offered again in support of legislation allowing the use of crop shares as well as cash rentals. In hearings before the Subcommittee on Taxation and Debt Management on August 4, 1980, Farm Bureau reemphasized that the benefits of special use valuation can be realized by farm families only if reasonable guidelines for methods of valuation and requirements for material participation are presented. To date, the Internal Revenue Service has not offered workable guidelines. Therefore, Farm Bureau supports amendments to the Internal Revenue Code that would provide realistic requirements to qualify for special use valuation. In particular, provisions are needed that address the interaction of Social Security benefits and special use valuation, as well as accommodate questions of material participation or active management of surviving spouses, minor children, and other similarly situated individuals who inherit property from a decedent who qualified for special use valuation. Farm Bureau believes that the Subcommittee's review of the Internal Revenue Service regulations on imputed interest rates and special use valuation is justifiable. All too often the role of the IRS is adversarial to the interests 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. Farm Bureau supports the 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 taxpayers. Thank you for consideration of Farm Bureau's comments. Statement of Helen Timmerman, Chairman National Association of Wheat Growers Committee on Taxation before the Senate Subcommittee on Oversight of the Internal Revenue Service on Special Use Valuation of Farm Land for Estate Tax Computation Mr. Chairman and members of the Committee: The National Association of Wheat Growers appreciates this opportunity to present its views on Internal Revenue Service regulations for special use valuation of farm land for estate tax purposes. I am Helen Timmerman, a Pendleton, Oregon 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 2032A(e)(7) calls for a valuation procedure for valuing farm real property used for farming purposes, based on the net rental return to the lessor. If you follow the procedure of 2032A(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 Internal Revenue Service regulation section 20.2032A-4 follows the procedure I just outlined, but only for one rental arrangement of farm land 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 The in-kind, crop share rent converted to its cash equivalent is the cash rental of this land and becomes the new return to the owner when annual to cash. 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 return to the lessor. It seems to me what is called for in the Internal Revenue Code 2032A (e) (7) is the net annual rent; i.e., the annual return to the asset, to capitalize over the interest rate determined in the code to arrive at the use valuation. Exhibit Al and The State of Oregon has developed a farm use appraisal method that determines the annual net rent for all agricultural lands regardless of leases. A2 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 average annual effective Federal Land Bank interest rate. Also included is Exhibit A3, page 1 and 2, farm use information sheets. Local yield and price data is readily available to convert crop-share rent to cash rent. Yield information may be obtained at the county USDA Local average yearly prices are available in every state from the USDA Economics and Statistics Service. ASCS office. 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 2032A (e) (7), but not on net return. Farms C and D are disallowed under 2032A (e) (7) and would be forced to use 2032A (e) (8) to obtain any use valuation. However, paragraph (8) also uses camparable sales, which distorts the valuation away from the actual use valuation available to Farm A. Following are sections of regulations that prevent a fair and equitable valuation: In 20.2032A (b) (1), the gross cash rent is not allowed to be diminished by any expenses associated with the farm operation or lease. This has the effect of preventing the valuation on the net return to the land. Under 20.2032A-4 (b) (2) (iii) rents paid in crop shares may not be used, thus denying the valuation on the net return to the land. It is interesting to note that proposed IRS regulations, in volume 45 of the Federal Register, page 31042 issued on July 19, 1978, recognize the need for converting crop share to cash. This provision was specifically disallowed by the final regulations, however, appearing as section 20.2032A-4 (b) (2) (iii). The goal stated in the summary of the Federal Register, volume 45, page 50736 (July 19, 1978) 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. The regulations must provide a valuation method that is fair and equitable. ##### |