AFFORD TO BUY IT. WE NEGOTIATED THE SALE FOR TWO WEEKS. HE PROPOSED A VERY LOW-INTEREST RATE OF 8 PERCENT, AND ONLY AFTER MUCH NEGOTIATION OF PRICE AND INTEREST RATE DID I FINALLY GET HIM UP TO 9-3/4 PERCENT." THE INTEREST RATES UNDER SECTION 482 AND 483 ARE RIDICULOUS FOR TRANSACTIONS IN MINNESOTA.

MR. CHAIRMAN, LET ME TURN TO AN EQUALLY COMPELLING PROBLEM IN CURRENT IRS REGULATIONS UNDER SECTION 2032A. THE REGULATIONS REQUIRE A CROP-SHARE ARRANGEMENT TO SATISFY THE QUALIFIED USE REQUIREMENT.

YET, THIS STRIKES AGAINST THE

SOCIAL SECURITY PROVISIONS IN OUR LAWS BY REQUIRING DAD TO
CROP-SHARE HIS FARM TO HIS OWN CHILDREN IN ORDER TO HAVE HIS
FARM QUALIFY FOR THE SPECIAL USE ESTATE TAX VALUATION. IN
DOING SO, DAD NEVER SEES ONE DOLLAR OF THAT SOCIAL SECURITY
HE SWEATED FOR. CLEARLY, MR. CHAIRMAN, THIS IS NOT THE
INTENT THAT CONGRESS HAD IN MIND WHEN THE SPECIAL USE VALUATION
PROVISION WAS PASSED. AND IT IS MY INTENT TO SEE THAT THESE
REGULATIONS ARE CHANGED SO THAT THE FAMILY FARM HAS AT LEAST
A FAIR CHANCE OF GETTING PASSED ON. I'VE INTRODUCED LEGISLATION
THAT ADDRESSES THIS PROBLEM AS WELL AS OTHER PROBLEMS IN
SECTION 2032A.

I AGREE THAT IN ORDER TO QUALIFY FOR THE LOWER ESTATE TAX VALUATION, THE FARM OR BUSINESS MUST BE OPERATED BY A

FAMILY MEMBER.

THAT MAKES SENSE AND IS A PART OF THE LAW.

AND INHERENT IN OPERATING A BUSINESS THAT ONE OWNS IS THE
CONCEPT OF OWNING AN EQUITY OR CONTINGENT INTEREST IN THE
BUSINESS. IF THINGS GO WELL, THE OWNER PROSPERS AND IF THEY
DON'T, THEN THERE IS A LOSS TO THE OWNER. BUT REQUIRING THE
DECEDENT TO CROP-SHARE TO HIS SON IS NOT NECESSARY TO ESTABLISH
THAT THE PROPERTY IS BEING USED IN A QUALIFIED USE. ONE
WOMAN WRITES IN A LETTER TO ME "...IT IS A MATTER OF WORDING
ONLY BECAUSE A FATHER WHO WORKED THE FARM WITH HIS SON HAS
MOST CERTAINLY AN EQUITY INTEREST (I.E., RECEIVED A RETURN
ON THE LAND THAT WAS CONTINGENT ON FARM EARNINGS)."

ANOTHER WRITER PUTS IT THIS WAY: "ONE EXAMPLE I SUBMIT IS THE CASE OF A FATHER-SON SITUATION; WHAT DIFFERENCE DOES IT MAKE IF THE SON PAYS THE FATHER CASH RENT (FUNDS EARNED SOLELY FROM THE FARMING OPERATION): OR IF HE SELLS CORN OR MILK AND THE ELEVATOR OR CREAMERY PAYS THE FATHER?" MR. CHAIRMAN, THERE IS NO DIFFERENCE IN THIS SITUATION.

CLEARLY,

THE PROPERTY IS BEING USED AS A FAMILY FARM AND A. MEMBER OF
THE FAMILY IS MATERIALLY PARTICIPATING IN THE TRADE OR BUSINESS
OF FARMING.

I AM PLEASED THAT THE SUBCOMMITTEE'S HEARING TAKES AN IMPORTANT FIRST STEP IN SOLVING THE PROBLEMS IN TRANSFERING FAMILY FARMS FROM ONE GENERATION TO ANOTHER. I LOOK FORWARD TO WORKING WITH YOU, MR. CHAIRMAN, AND OUR COLLEAGUES ON THE FINANCE COMMITTEE IN ELIMINATING THESE PROBLEMS FOR THE FAMILY FARMERS.

TESTIMONY OF

SENATOR JOHN MELCHER

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT OF THE
INTERNAL REVENUE SERVICE

COMMITTEE ON FINANCE

April 27, 1981

MR. CHAIRMAN. I AM PLEASED TO HAVE THE OPPORTUNITY TO APPEAR BEFORE YOUR SUBCOMMITTEE TODAY AND TESTIFY ON PROPOSED IRS REGULATIONS GOVERNING SECTIONS 482 AND 483 OF THE TAX CODE.

ON AUGUST 29, 1980, THE IRS PUBLISHED PROPOSED NEW REGULATIONS THAT WOULD SET IMPUTED INTEREST RATES ON LOANS BETWEEN FINANCIALLY RELATED ENTITIES AT 12 PERCENT, IF THE STATED INTEREST RATES ARE NOT AT LEAST 11 PERCENT;

AND WOULD SET

IMPUTED INTEREST RATES AT 10 PERCENT ON DEFERRED PAYMENTS IN
THE CASE OF CERTAIN OTHER SALES OF PROPERTY, IF THE STATED
INTEREST RATES ARE BELOW 9 PERCENT. THE PROPOSED MODIFICATIONS
TO THESE SECTIONS OF THE CODE WOULD INCREASE IMPUTED INTEREST
RATES IN SUCH SALES OF PROPERTY 50 PERCENT OR MORE OVER EXISTING
LEVELS.

WHEN THESE REGULATIONS WERE PUBLISHED, THERE WAS AN IMMEDIATE OUTCRY OF OPPOSITION FROM FARM GROUPS, SMALL BUSINESS PEOPLE, AND THOSE IN THE REAL ESTATE AND HOME BUILDING INDUSTRIES. WITHIN A SHORT PERIOD, THE IPS HAD RECEIVED SOME 2,500 WRITTEN COMMENTS OPPOSING THESE REGULATORY CHANGES, AND MANY HUNDREDS MORE FLOODED CONGRESSIONAL OFFICES. THE OPPOSITION HAS CONTINUED TO GROW BECAUSE, WHILE THESE NEW REGULATIONS DO NOT CREATE ANY

SIGNIFICANT IMPROVEMENT IN TAX EQUITY, THEY WOULD HAVE A DISTINCT NEGATIVE IMPACT ON BUSINESS AND THE ECONOMY THROUGH PROMOTING HIGHER INTEREST RATES.

SELDOM IN MY EXPERIENCE HAVE I SEEN SUCH UNIVERSAL OPPOSITION TO A NEW SET OF REGULATIONS. THIS OVERWHELMING EXPRESSION OF OPPOSITION TO THE IRS PROPOSALS, AND A TOTAL LACK OF COOPERATION FROM THE IRS WHICH INCLUDED NOT EVEN RESPONDING TO MY INQUIRIES

FOR MORE THAN TWO MONTHS

RESULTED IN MY INTRODUCING AN AMENDMENT

TO THE LAST CONTINUING APPROPRIATIONS BILL, PROHIBITING THE USE
OF FUNDS TO IMPLEMENT THE PROPOSED REGULATIONS. I ONLY WITHDREW
MY AMENDMENT AFTER THEN-ASSISTANT SECRETARY OF TAX POLICY,
DONALD LUBICK, AGREED TO POSTPONE ISSUING THE FINAL REGULATIONS
UNTIL AT LEAST JULY 1, 1981, IN ORDER TO GIVE CONGRESS TIME TO
REVIEW THE ISSUE.

-

EARLY IN THIS SESSION OF CONGRESS, LEGISLATION WAS INTRODUCED IN BOTH HOUSES OF CONGRESS MY BILL WITH SENATORS BAUCUS, HEFLIN, JEPSEN, LUGAR, PRYOR, SYMMS, PRESSLER, ANDREWS, ABDNOR, ZORINSKY, EAGLETON, BOSCHWITZ, KASTEN, AND COCHRAN AS COSPONSORS IN THE SENATE, AND A COMPANION BILL BY REPRESENTATIVE TOM DASCHLE WITH TWO DOZEN COSPONSORS IN THE HOUSE THAT WILL PERMANENTLY KILL THESE PROPOSED REGULATIONS.

I BELIEVE THERE IS SUFFICIENT SUPPORT TO PASS THIS LEGISLATION; HOWEVER, THE SUPPORTERS OF THIS LEGISLATION HAVE CONTINUED TO TRY TO WORK WITH THE NEW ADMINISTRATION TO REACH A SATISFACTORY SOLUTION SHORT OF A TOTAL BAN. 27 OF THE LEGISLATION'S COSPONSORS WROTE TO SECRETARY OF THE TREASURY REGAN ON MARCH 13, 1981, REQUESTING THAT TREASURY WITHDRAW THE PROPOSED REGULATIONS AND WORK WITH CONGRESS TO DEVISE NEW LANGUAGE WHICH WOULD PROTECT AGAINST TAX AVOIDANCE AND YET NOT NEEDLESSLY PENALIZE THE GREAT

BULK OF TAXPAYERS AFFECTED BY THESE REGULATIONS. TO DATE WE HAVE

HAD NO RESPONSE.

I WANT TO FOCUS MY TESTIMONY TODAY ON TWO AREAS.

THE FIRST DEALS WITH SPECIFIC QUESTIONS ON THE REGULATIONS AND THE UNDERLYING CODE; AND THE SECOND RAISES QUESTIONS ON WHAT OUR CURRENT TAX PHILOSOPHY OUGHT TO BE IN THIS AREA.

ONE OF THE MOST OFTEN ASKED QUESTIONS ABOUT THESE REGULATIONS CONCERNS INTRA-FAMILY TRANSACTIONS. ACCORDING TO THE LANGUAGE OF THE PROPOSED REGULATIONS, PARAGRAPH 1.482-2 SETS MINIMUM IMPUTED INTEREST RATES ON TRANSACTIONS BETWEEN FINANCIALLY RELATED PARTIES AT 12 PERCENT UNLESS THE STATED INTEREST FALLS IN A SAFE-HAVEN RANGE OF 11 TO 13 PERCENT. THIS IS HIGHER EVEN THAN THE INTEREST RATES FOR NON-RELATED PARTIES. IN ITS BACKGROUND REPORT TO YOUR SUBCOMMITTEE, THE JOINT COMMITTEE ON TAXATION STATES,

" ...IF A PARENT SOLD THE FAMILY FARM TO A CHILD

UPON RETIREMENT, THE TRANSACTION WOULD NOT BE SUBJECT
TO SECTION 482 BECAUSE THE PARENT WOULD NOT BE

ENGAGED IN A TRADE OR BUSINESS."