DISPARITY IN RATES BETWEEN SECTION 482 AND 483 HAS CREATED, AND COULD CONTINUE TO CREATE, SUBSTANTIAL CONFUSION IN FAMILY BUSINESS TRANSACTIONS. SPECIAL USE VALUATION MR. CHAIRMAN, FINAL REGULATIONS GOVERNING THE SPECIAL USE VALUATION FOR FARM PROPERTY, SECTION 2032A OF THE INTERNAL REVENUE CODE, WERE ISSUED ON JULY 28, 1980. THE REGULATIONS IN THEIR FINAL FORM HAVE CAUSED CONSIDERABLE CONCERN IN THE FARM COMMUNITY BECAUSE THEY SEEM TO BE AT VARIANCE, IN SOME WAYS, FROM THE GOALS OF SECTION 2032A AS PASSED BY CONGRESS. IT IS GOOD THAT THE SUBCOMMITTEE IS TAKING THIS OPPORTUNITY TO REVIEW THE REGULATIONS, SO THAT WE CAN SEE WHAT THE PROBLEMS ARE AND HOW THEY MIGHT BEST BE SOLVED. ONE OF MY OWN CONCERNS WITH THE TREASURY INTERPRETATION OF THE SPECIAL USE VALUATION PROVISIONS HAS BEEN THE DENIAL OF SPECIAL USE VALUATION WHERE LAND IS LEASED ON A CROP-SHARE RATHER THAN A CASH BASIS. THIS MEANS THAT IN AREAS WHERE CROP-SHARE RENTALS ARE THE RULE RATHER THAN THE EXCEPTION, SPECIAL USE VALUATION IS EFFECTIVELY DENIED. IN THOSE CASES, EVEN THOUGH NEARBY LAND MAY BE COMPARABLE, IT CANNOT BE USED AS A STANDARD OF VALUATION IF IT IS LEASED ON A CROP-SHARE BASIS. IT IS NOT CLEAR THAT THIS RESULT IS COMPELLED BY THE LANGUAGE OF SECTION 2032A, AND IN FACT THE FIRST VERSION OF THE REGULATIONS PROPOSED BY THE TREASURY TO IMPLEMENT SECTION 2032A ALLOWED CROP-SHARE RENTALS AS A STANDARD OF VALUATION. THAT WAS BACK IN 1978, AND I AM NOT SURE WHAT HAS CHANGED SINCE THEN TO JUSTIFY THE REVERSAL OF POSITION. MR. CHAIRMAN, THERE ARE OTHER PROBLEMS WITH THE SPECIAL USE REGULATIONS, AND I AM SURE THE WITNESSES WILL BRING THESE OUT AND SUGGEST WAYS TO DEAL WITH THEM. SOME OF THESE PROBLEMS ARE THE SUBJECT OF PENDING LEGISLATION: I MYSELF HAVE A BILL THAT WOULD, I BELIEVE, RESOLVE THE CROP SHARE QUESTION DESCRIBED ABOVE. BUT OUR JOB TODAY IS TO SEE WHAT THE DIFFICULTIES ARE, AND, I HOPE, TO DETERMINE WHETHER SOME OF THEM CAN BE TAKEN CARE OF WITHOUT THE NEED FOR FURTHER LEGISLATION. IT IS ALWAYS PREFERABLE TO RESOLVE MATTERS THROUGH THE ADMINISTRATIVE PROCESS IF THAT CAN BE DONE. IF IT CANNOT, WE WILL SEE WHAT LEGISLATIVE CHANGES ARE APPROPRIATE. I KNOW MANY MEMBERS ARE CONCERNED WITH THE LIMITATION IN THESE REGULATIONS ON CASH LEASES TO FAMILY MEMBERS, WITH THE DEFINITION OF A 'PRESENT INTEREST' FOR PURPOSES OF QUALIFYING FOR SPECIAL USE VALUATION, AND WITH THE STANDARDS OF COMPARABILITY THAT THE IRS REQUIRES VALUING FARM PROPERTY. SEVERAL MEMBERS ARE HERE TODAY TO TESTIFY ON THESE ISSUES, AND I BELIEVE THERE PRESENCE DEMONSTRATES THE CONTINUING CONCERN OVER THE WAY THIS LAW HAS BEEN INTERPRETED AND ADMINISTERED. I LOOK FORWARD TO HEARING THE TESTIMONY, AND I HOPE THAT WE CAN FIND A COMMON GROUND OF AGREEMENT. IN CONCLUSION, MR. CHAIRMAN, THE SUBJECTS AT ISSUE TODAY MAKE CERTAIN THAT THIS HEARING WILL BE CONSIDERED TIMELY AND IMPORTANT TO A SIGNIFICANT SEGMENT OF THE PUBLIC. DAVE DURENBERGER MINNESOTA United States Senate WASHINGTON, D.C. 20510 MR. CHAIRMAN, THANK YOU FOR HOLDING THESE HEARINGS TODAY REGARDING PROPOSED REGULATIONS UNDER SECTIONS 482, I AM PLEASED BECAUSE THE LEADERSHIP OF THE 97TH CONGRESS, NATION. AS THE SENIOR SENATOR FROM MINNESOTA I AM PERHAPS IN A UNIQUE POSITION TO SPEAK OUT ON BEHALF OF FAMILY FARMERS. MINNESOTA HAS OVER 92.000 FAMILY FARMS WITH THE LARGEST NUMBER OF FAMILY FARM WORKERS IN THE UNITED STATES. NEARLY 90 PERCENT OF ALL FARMS IN MINNESOTA ARE OWNED AND OPERATED BY FAMILY MEMBERS. FAMILY FARMING IS A REALITY IN MINNESOTA. MINNESOTA HAS 30 MILLION ACRES OF FARM LAND. THE AVERAGE IN SOUTHERN MINNESOTA ARE CLOSER TO $2,000--2,500 PER ACRE. NEEDLESS TO SAY, THE REGULATIONS BEING DISCUSSED TODAY HAVE A DEVASTATING EFFECT IN MY STATE. TO BUILD AND MR. CHAIRMAN, IT IS IMPORTANT TO NOTE THAT THE WORD "FAMILY" IS AS IMPORTANT AS THE WORD "FARM." IT TAKES AN ENTIRE FAMILY MOM, DAD, AND THE CHILDREN MAINTAIN A SOLVENT FARM ENTERPRISE. AND THESE REGULATIONS STRIKE AT THE HEART OF THIS FAMILY UNIT. THE FEDERAL GOVERNMENT IS DICTATING INTEREST RATES ON FAMILY FARM PROPERTY TRANSACTIONS. FURTHERMORE, THE IRS REGULATIONS UNDER SECTION 2032A STRIKE AGAIN AT THE FAMILY FARM. I'LL DEAL MORE WITH THAT ISSUE LATER. A LAWYER FROM WELLS, MINNESOTA, WHO REPRESENTS FAMILY FARMS AND BUSINESSES, WROTE TO ME SAYING "...IF THESE REGULATIONS UNDER 482 AND 483 ARE SUPPOSED TO REFLECT THE MARKET CONDITIONS FOR CERTAIN TYPES OF TRANSFERS, THEN THE PROPOSED REGULATION DOES NOT DO THAT. I HAVE BEEN ENGAGED IN THE GENERAL PRACTICE OF LAW IN SOUTHERN MINNESOTA FOR TEN YEARS AND HAVE NEVER DRAWN A CONTRACT FOR DEED ON FARM PROPERTY BETWEEN UNRELATED PARTIES FOR AN ANNUAL INTEREST RATE OF MORE THAN 8 PERCENT. IN FACT, THE MAJORITY OF THE CONTRACTS HAVE BEEN BETWEEN 6 AND 7 PERCENT." ON BEHALF OF THE STATE OF MINNESOTA, OUR STATE COMMISSIONER OF AGRICULTURE TESTIFIED BEFORE THE INTERNAL REVENUE SERVICE TO CONVEY THE OPINIONS OF MINNESOTANS THROUGHOUT THE STATE THAT THE IMPUTED INTEREST RATES ON RELATED PARTY TRANSACTIONS DISCRIMINATE AGAINST FAMILY FARMERS AND ARE INFLATIONARY. AND THE CITY FOLKS ARE NOT ANY HAPPIER ABOUT IT. IN A LETTER FROM MINNEAPOLIS, ONE MAN STATES THAT THE RETROACTIVE " A FRUSTRATED TAXPAYER FROM KASOTA MINNESOTA WROTE TO ME AND SAID ...I HAVE RECENTLY HAD TO SELL MY FARM. THE REALTORS TOLD ME THAT INTEREST RATES WERE GOING ANYWHERE FROM 7 TO 15 PERCENT. THERE IS NO AVERAGE. THEY ARE UP AND DOWN, ALL OVER, DEPENDING UPON WHAT TWO PEOPLE COULD AGREE ON. THIS, OF COURSE, IS PARTIALLY CAUSED BY THE EXPREMELY POOR ECONOMY THAT HAS BEEN CAUSED BY EXCESSIVE GOVERNMENT REGULATION IN THE FIRST PLACE. MY FARM WAS ON THE MARKET FOR MANY MONTHS WITH VERY LITTLE ACTIVITY BECAUSE NO ONE COULD AFFORD TO BUY IT WITH THE RIDICULOUS INFLATION THAT THE GOVERNMENT HAS GIVEN US. FINALLY A MILLIONAIRE DID COME ALONG WHO COULD |