Taxlink

A bombastic headline, right? After all, the IRS role is to enforce the tax code, not fight it. Generally, the IRS adheres to the law in its enforcement activities. The exception seems to be ag taxation. Congress has provided several special rules for farm taxation. But in some locales within the IRS, there is a pattern of attacking those privileges. I am retiring at the end of this year, and it might be an appropriate time to recount a few of the battles over a 45-year career.

INCORPORATING A FARM

In the mid-1970s, there was a period of prosperity that led to many family-farm incorporations. The code allows the tax-free transfer of receivables and unsold inventories into the corporation. But IRS examiners asserted that grain and livestock inventory were not transferable property, attempting to trigger income to the incorporator. After numerous private rulings rebuffed examiners, the IRS National Office ended this mischief by publishing a 1980 Revenue Ruling that agents could no longer ignore.

COMMODITY WAGES

Wages are always taxable income. However, for payroll tax purposes, there are some exceptions in the tax code, and one of those applies to agriculture. Only cash wages in ag are subject to payroll taxes. In several pockets of the country in the late 1980s/early 1990s, IRS examination groups asserted that commodity payments to employees were subject to payroll taxes. In Indiana and Iowa, the number of examinations was massive. Finally, the IRS National Office convened a panel of ag tax experts who haggled out a position known as a Market Segment Guideline. This acknowledged the validity of the exception in the law but also laid out a framework to assure that taxpayers were compliant when using a non-cash wage.

FARMLAND SELF-RENTALS

By law, the rental of real estate isn't subject to self-employment tax. But in the 1990s, the IRS, using a definition applicable to crop share arrangements, asserted that an individual leasing land to his farming entity was subject to SE tax. This also turned into a large number of IRS exams of farmers, never mind that their brethren in town faced no such assertion. This one took litigation, all the way to the Eighth Circuit, before the McNamara case resolved the matter in taxpayers' favor.

CRP RENTALS

Again, the IRS was asserting self-employment tax on rents but, this time, on USDA Conservation Reserve Program rents. The IRS took the position that the one-time grass cover put on that land made the landowner an ag producer. A systemwide program out of Bismarck wreaked havoc with hundreds until the courts again intervened. The Morehouse Eighth Circuit decision resolved this one. Here, kudos are due to Pheasants Forever for its lead in fund-raising to help with two rounds of litigation costs.

Thank goodness for the courts, and thank goodness for those taxpayers willing to stand up to IRS positions that are outside the law.

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Tax Columnist Andy Biebl is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minn.

Read Andy's "Ask the Taxman" column at www.about.dtnpf.com/tax.

You may email Andy at askandy@dtn.com

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