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INTRODUCTION

The Senate Finance Committee's Subcommittee on Oversight of the Internal Revenue Service has scheduled a hearing on April 27, 1981, regarding regulations recently proposed or promulgated under sections 482, 483, and 2032A of the Internal Revenue Code and their impact on family farms and businesses. Section 482 relates to the tax characterization of transactions between related organizations, trades or businesses. Section 483 relates to the treatment of a portion of certain installment payments as the payment of interest. Section 2032A relates to the valuation, for estate tax purposes, of qualified real property used in farming or another family business.

This pamphlet, prepared in connection with the hearings, contains three parts. The first part discusses sections 482 and 483. The second part discusses section 2032A. Each of these parts describes the relevant legislative history, present law, and the issues raised by recent regulatory changes (or proposed changes) that affect taxpayers subject to these sections. Part three describes the Federal Land Bank program to assist in the financing of farm real estate and presents other data on farm real estate financing.

(1)

I. IMPUTED INTEREST RATES (SECTIONS 482 AND 483)

Section 482

A, Legislative History

The internal revenue laws have contained a provision substantially similar to section 482 since the Revenue Act of 1921. Section 240 (d) of that Act permitted the Commissioner to consolidate the returns of "two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests... for the purpose of making an accurate distribution of gains, profits, income, deductions or capital between or among such related trades or businesses." The report of the Committee on Finance stated that the provision was "necessary to prevent the arbitrary shifting of profits among related businesses. . . ." (Senate Rep. No. 275, 67th Cong., 1st Sess. (1921)).

In the Revenue Act of 1934, the current provision was amended by adding the word "organizations" to "trades or businesses" to "remove any doubt as to the application of this section to all kinds of business activities." (H. R. Rep. No. 704, 73d Cong., 2d Sess. 1934)). In the Revenue Act of 1943, the words "credits or allowances" were added to "income or deductions."

Section 483

Section 483 was added to the Code in 1964 and has not been amended substantively since its enactment. The report of the Committee on Finance with respect to this provision sets forth the following reasons for the provision:

[T]here is no reason for not reporting amounts as interest income merely because the seller and purchaser did not specifically provide for interest payments. This treats taxpayers differently in what are essentially the same circumstances merely on the grounds of the names assigned to the payments. In the case of depreciable property this may convert what is in reality ordinary interest income into capital gain to the seller. At the same time the purchaser can still recoup the amount as a deduction against ordinary income through depreciation deductions. Even where the property involved is a nondepreciable capital asset, the difference in tax bracket of the seller and buyer may make a distortion of the treatment of the payments advantageous from a tax standpoint. The House and [the Finance Committee] believe that manipulation of the tax laws in such a manner is undesirable and that corrective action is needed. (S. Rep. No. 830, 88th Cong., 2d. Sess. 102)

(2)

The Finance Committee report provided the following guidance for determining the interest rate to be used to carry out the purposes of section 483:

The interest rate to be used for purposes of this provision is to be a rate provided by regulations prescribed by the Secretary of the Treasury or his delegate. It is anticipated that any rate specified by the Secretary of the Treasury or his delegate will reflect the going rate of interest and will not be higher than the rate at which a person, in reasonably sound financial circumstances and with adequate security could be expected to borrow money from a bank. (S. Rep. No. 830, 88th Cong., 2d. Sess. 102)

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