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Senator Charles E. Grassley, Chairman of the Subcommittee on Oversight of the Internal Revenue Service of the Senate Committee on Finance announced today that the Subcommittee will hold a hearing on Monday, April 27, 1981, on recent IRS regulations under Internal Revenue Code sections 482, 483, and 2032A which may have a substantial impact on family farms and other family businesses.

In announcing the Subcommittee hearing, Senator Grassley noted that many members of the public have maintained that these regulations may be adding restrictions and additional tax liabilities not intended by Congress.

Proposed regulations under section 482 would, in certain circumstances, allow the IRS to assume an interest rate of 12% on loans between related entities if interest is not charged at a rate between 11 and 13%. Proposed regulations under section 483 would allow the IRS to assume an interest rate of 10 percent if property is sold on an installment basis with a contract rate of less than 9 percent. This imputed interest rule has the effect of characterizing part of the sales price of property as interest taxable to the seller as ordinary income, rather than capital gain, and creating a corresponding interest paid deduction for the buyer.

Final regulations under section 2032A, adopted July 28, 1980, specify circumstances under which real property used for farming or in other family business use may be valued for estate tax purposes on the basis of the property's actual use. Generally, under the estate tax provisions, property is valued at its "highest or best" use. Section 2032A was enacted in 1976 to reduce estate taxes on farm and business property to help heirs keep the farm or other business within the family.

The Senator stated, "The Subcommittee has a responsibility to review the implementation of these areas of the tax law to make certain that administrative rules do not create tax burdens on family farms and businesses not justified by reasonable interpretation of Internal Revenue Code or legislative history:

Requests to Testify. Witnesses who desire to testify at the hearing on April 27, 1981 must submit a written request to Robert E. Lighthizer, Chief Counsel, Committee on Finance, Room 2227 Dirksen Senate Office Building, Washington, D.C. 20510, to be received no later than noon on April 20, 1981. Witnesses will be notified as soon as practicable thereafter whether it has been possible to schedule them to present oral testimony.

If for some reason a witness is unable to appear at the time scheduled, he may file a written statement for the record in lieu of the personal appearance. In such case a witness should notify the Committee of his inability to appear as soon as possible.

Consolidated testimony. Senator Grassley urged all witnesses who have a common position or with the same general interest to consolidate their testimony and designate a single spokesman to present their common viewpoint orally to the Subcommittee. This procedure will enable the Subcommittee to receive a wider expression of views than it might othewise obtain. Senator Grassley urged very strongly that all witnesses exert a maximum effort to consolidate and coordinate their statements.

Legislative Reorganization Act. Senator Grassley stated that the Legislative Reorganization Act of 1946, as amended requires all witnesses appearing before the Committees of Congress "to file in advance written statements of their proposed testimony, and to limit their oral presentations to brief summaries of their argument."

Witnesses scheduled to testify should comply with the following rules:

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Written statements. Witnesses who are not scheduled to make an oral presentation, and others who desire to present their views to the Subcommittee, are urged to prepare a written statement for submission and inclusion in the printed record on the hearings. These written statements should be typewritten, not more than 25 double-spaced pages in length, and mailed with five (5) copies to Robert E. Lighthizer, Chief Counsel, Committee on Finance, Room 2227, Dirksen Senate Office Building, Washington, D.C. 20510, not later than Monday, May 11, 1981.

P.R. # 81-119






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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.



A, Legislative History Section 482

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)


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