STATEMENT OF HON. MARK ANDREWS, U.S. SENATOR FROM THE STATE OF NORTH DAKOTA Senator ANDREWS. Well, for not having made those complimentary remarks, you might be in trouble because we are marking up the farm bill right now. [Laughter.] Senator GRASSLEY. Well, I have no doubt that you are going to take care of our interests. Senator ANDREWS. You can revise and extend your remarks, Mr. Chairman. I certainly appreciate your making time for me and this panel. I am pleased to learn that you scheduled oversight hearings on two agricultural tax issues that could have quite a negative impact on farm families in rural areas of the Nation. It seems to be a tossup as to which of these two regulations being promulgated by the IRS would have the more severe impact. I have contacted IRS to express my concern over both issues. I have also cosponsored legislation, with many of you on the Finance Committee, to prohibit the adoption of these proposed regulations. With respect to the proposal to increase the interest rates imputed under sections 482 and 483 of the Internal Revenue Code, I cosigned a letter to Secretary Regan, on March 13, with several of my colleagues, who like me, are concerned about the effect these regulations would have on the farming community. We asked the Secretary to consider withdrawing the regulations. In the letter we pointed out that withdrawal of the proposed regulations would provide an excellent opportunity to demonstrate the administration is serious about setting a new tone and direction in tax policy and in the use of regulatory authority. To date, frankly, I have not received any reply to this request. It concerns me a lot that we can't get a reply any sooner than this from a member of the President's Cabinet on an issue that could have such a devastating impact on the farming population. The letter to the Secretary fully outlined the concerns over the potential impact of the regulations that have been expressed to me by farmers, farm organizations, and small business people. My main concern with the regulations is the impact they would have on the beginning farmer who is ready to take over the family farm. It is my understanding that under the proposed regulations, higher interest rates would be required on loans for the sale of property to a family member, than on loans to a nonfamily member. This doesn't make good sense, but it is a darn good way to further jeopardize the continuance of family farming. I think actually, if I might say, Mr. Chairman, the total disregard of the Secretary of the Treasury to answer a letter from a number of Senators really appalls me. If they are going to be a responsive and open administration, they can at least understand that we wouldn't have sent the letter if we weren't deeply concerned. If they can't give an answer, perhaps they recognize how totally off-the-wall this proposal is. But, I would hope, Mr. Chairman, that you might, as a member of the Finance Committee, get an answer where we have not been able to. I am equally concerned about another regulation the IRS would like to see enforced concerning valuation of farm property for estate tax purposes. Being a strong promoter for estate tax reform ever since coming to Congress, some 18 years ago, I was pleased back in 1976 that we were able to change the law by adding the farm use valuation provisions now known as section 2032(a) of the Internal Revenue Code. As you know, this provision allows farms, for estate tax purposes to be valued on the basis of productive farm capacity, rather than a prevailing market price, which so often is more a hedge against inflation than a figure that reflects the actual earning potential of it as a piece of farm land. Congress also recognized back then, that if we failed to enact this type of provision, we were about to witness yet a further decline of a very important economic segment of our population, our family farms. Not surprisingly, however, the Internal Revenue Service has chosen to interpret this legislation in its usual narrow fashion by issuing regulations disallowing the productive farm capacity valuation if the farm had been cash rented previously. They don't seem to understand or maybe don't care that cash renting is the usual way of handling a farm business between father and son or two other relatives. I would suspect, Mr. Chairman, in Iowa as it is in North Dakota, if you are young and starting out and your grandparents have a piece of land you have grown up on and those grandparents are in their sixties or their seventies they arrange a cash rent basis between themselves and you. This is typical. This is normal. This is accepted. This is the way farm families operate. That is why Congress set the bill up that way. If this system is subjected to a punishing tax, it is going to be flying in the face of congressional intent, and flying in the face of everything that represents normality in farm family transactions. There is no question in my mind that Congress clearly intended that passive (cash) rental, to a relative, would qualify the estate for 2032(a) valuation, as long as other requirements of this section were met. I am cosponsoring legislation with Senator Boschwitz, which clearly states that qualified use may be performed by the member of the decedent's family or the decedent. The Senator was successful in getting an identical amendment to the continuing resolution passed last December, in the Senate, but it was later dropped during the dispute over congressional pay raises. As a Member of the House, last year, I was responsible in the House Appropriations Committee for including continuing resolution report language prohibiting the IRS from spending any funds to implement this regulation, according to their interpretation of qualified use. So both Houses have spoken to this issue and have spoken quite clearly. Based on what I believe to be the congressional intent of these two sections of the law, I would like to see these regulations withdrawn. If this is not the view of the IRS, I see no other alternative than to make sure we pass in quick order the legislation introduced by Senators Boschwitz and Melcher to prevent these devastating regulations from going into effect. Both of these regulations put the family farm on the chopping block again. If we mean to protect and preserve the family farming system from further demise, we must see that they are not allowed to go into effect. Mr. Chairman, again, thanks so much for allowing me to testify before this committee. My thanks also, to you for allowing me to proceed out of turn. My apologies to those of you whose_testimony we interrupted. Senator GRASSLEY. Before you leave, I would like to ask Senator Bentsen if he has any questions to ask of Senator Andrews. Senator BENTSEN. Thank you, Mr. Chairman. No, I do not, Mr. Chairman. Senator GRASSLEY. Your comments reiterate positions I have made public in the past. You have been a very vocal spokesman for agriculture in the House. I know you will be an even greater spokesman for agriculture in the Senate. Thank you. Senator ANDREWS. The farm families of the Nation can't have a better spokesman, Mr. Chairman, than you, with your background in agriculture in the State of Iowa. Senator GRASSLEY. Thank you, Senator Andrews. Senator ANDREWS. It is a pleasure to appear before you. [The prepared statement of Senator Mark Andrews follows:] TESTIMONY BY SENATOR MARK ANDREWS, BEFORE THE SUBCOMMITTEE ON Mr. Chairman: I was pleased to learn that you had scheduled oversight hearings on two agricultural tax issues that could have quite a negative impact on farm families in the rural areas of the nation. It seems to be a toss up as to which of the two regulations being promulgated by the IRS would have the more severe impact. I have contacted the IRS to express my concern over both issues and have also cosponsored legislation to prohibit the adoption of these proposed regulations. With respect to the proposal to increase the interest rates imputed under Sections 482 and 483 of the Internal Revenue Code, I co-signed a letter to Secretary Regan on March 13 with several of my colleagues, who, like me, are concerned about the effect these regulations would have on the farming community. We asked the Secretary to consider withdrawing the regulations. In the letter, we pointed out that withdrawal of the proposed regulations would provide an excellent opportunity to demonstrate that the Administration is serious about setting a new tone and direction in tax policy and in the use of regulatory authority. To date, I haven't received any reply to this request-and, frankly, it concerns me a lot that we can't get a reply any sooner than this from a member of the President's Cabinet on an issue that could have such a devastating impact on the farming population. The letter to the Secretary fully outlined the concerns over the potential impact of the regulations that have been expressed to me by farmers, farm organizations and small business people. My main concern with the regulations is the impact they would have on the beginning farmer who is ready to take over the family farm. It's my understanding that under the proposed regulations, higher interest rates would be required on loans for the sale of property to a family member than on loans to non-family members. This doesn't make good sense, but it's a darn good way to further jeopardize the continuance of family farming. I'm equally concerned about the regulation the IRS would like to see enforced concerning valuation of farm property for estate tax purposes. Being a strong promoter of estate tax reform ever since coming to Congress, I was pleased back in 1976 that we were able to change the law by adding the "farm use valuation" provisions, now known as section 2032A of the Internal Revenue Code. As you know, this provision allows farms, for estate tax purposes, to be valued on the basis of productive farm capacity, rather than the prevailing market price. Congress also recognized back then that if we failed to enact this type of provision, we were about to witness yet a further decline of a very important economic segment of our population-family farms. Not surprisingly, however, the Internal Revenue Service has chosen to interpret this legislation in its usual narrow fashion by issuing regulations disallowing the productive farm capacity valuation if the farm had been cash rented previously. They don't seem to understand, or maybe don't care, that cash-renting is the usual way of handling a farm business between father and son, or two other relatives. If this system is subjected to a punishing tax, it would be flying in the face of Congressional intent. There is no question in my mind that Congress clearly intended that passive (cash) rental to a relative would qualify the estate for 2032A valuation, as long as other requirements of the section were met. I'm co-sponsoring legislation with Senator Boschwitz, which clearly states that qualified use may be performed by the decedent or a member of the decedent's family. The Senator was successful in getting an identical amendment to the Continuing Resolution passed last December, but it was later dropped during the dispute over Congressional pay raises. I was responsible in the House for including continuing resolution report language prohibiting the IRS from spending any funds to implement this regulation according to their interpretation of "qualified use.' Based on what I strongly believe to be the Congressional intent of these two sections of the law, I would like to see these regulations withdrawn. If this is not the view of the IRS, I see no other alternative than to make sure we pass, in quick order, the legislation introduced by Senators Boschwitz and Melcher to prevent these devastating regulations from going into effect. Both of these regulations put the family farm on the chopping block again, and if we mean to protect and preserve the family farming system from further demise, we must see that they are not allowed to go into effect. Senator GRASSLEY. Thank you. Mr. EGGER. Yes, I will proceed. As I said, in the final regulations, we are providing that where the literal terms of both sections 482 and 483 are met in the same transaction, or would apply in the same transaction, then the regulations will provide for section 483 to be controlling. The final regulations under section 482 will in general provide that the Internal Revenue Service can impute a 12-percent interest rate on loans between commonly-controlled trades or businesses, unless the taxpayer charges a rate between 11 and 13 percent, or establishes that a different rate would be an appropriate arm's length rate. Under present regulations, the comparable rates are 7 percent and the range is 6 to 8 percent. The final regulations under section 483 will in general provide that unless a contract for the sale of property provides for at least 9-percent simple interest on deferred payments, then a rate of 10 percent, compounded semiannually is imputed. Under the present regulations the comparable rates are 6 and 7 percent. Many comments asserted that the proposed rates would have a negative and unfair impact on family farming and family businesses because higher interest rates would be required on loans for the sale of property to a family member than on loans for the sale of property to a nonfamily member. This is based on the assump tion that such sales would be governed by section 482 rather than section 483. The final regulations, as I explained, would eliminate any possible problem in this regard, by providing that, in the event the literal terms of both sections applied to a transaction, then section 483 will override. Thus, the 9-percent miminum interest rate will be sufficient for sales of property to a family member, as well as for sales of property to a nonfamily member. Consistent with the letter to Senator Melcher, last December, from Donald Lubick, former Assistant Secretary for Tax Policy, we will not issue final regulations on these issues before July 1, 1981. We have decided, however, in view of the many taxpayer inquiries regarding the imputed rates, to announce our decision through this statement and through a news release which is being issued today. We have carefully considered whether the final regulations should maintain the effective dates provided in the proposed regulations. These dates, you will recall, are August 29, 1980, for the regulations under section 482, and September 29, 1980, for the regulations under section 483. We believe it would have been consistent with Mr. Lubick's letter to maintain these effective dates. However, because there has been some considerable confusion about whether Mr. Lubick's letter portended a delay in the effective dates until July 1, 1981, and in order to extend to the Congress every courtesy in its review of the issues raised by the proposed regulations, we have decided that the final regulations will generally be made effective as of July 1, 1981. Mr. Chairman, I would like the balance of our statement to go in the record in its entirety. That ends the summary. We will either answer questions on these issues now or wait until we have finished with the 2032A testimony which Mr. Chapoton will give. Senator GRASSLEY. I think we will go ahead with the Secretary's statement at this point. STATEMENT OF HON. JOHN E. CHAPOTON, ASSISTANT Mr. CHAPOTON. Mr. Chairman, I want to cover the problems that have arisen under regulations dealing with the rather complex provisions of section 2032A, of the code. First, I would like to say in response to Senator Andrews' comment, that our testimony will directly address the questions raised in that letter. A response will go out consistent with this testimony. I would also mention that in response to that letter, Mr. Eggers and I undertook a thorough review of both of these provisions some weeks ago, particularly the provision under sections 482, and 483, and have had them on the front burner for some period of time. We have not been ignoring this question. We understand the subcommittee is primarily interested in three areas under the section 2032A, regulations: First, the circumstances under which property held in trust may qualify for special use valuation; second, whether the "qualified |