6. S. 1691 (Senators Conrad, Daschle, Durenberger,
Grassley, and Others)

Tax Credit for Environmental Pollution Control Property and
for Soil and Water Conservation Expenditures

Present Law

Present law does not provide tax credits for property
used to control environmental pollution. However, Code
section 48 does provide an energy tax credit for certain
energy property (generally, equipment that uses solar energy
or energy derived from a geothermal deposit) and a
reforestation tax credit for qualified timber property.

In addition, under Code section 175, a taxpayer may
deduct certain soil and water conservation expenditures.
Such deductions generally cannot exceed 25 percent of gross
income derived from farming in the year. Under Code section
169, a taxpayer can elect to amortize certain pollution
control facilities over a five-year period. Only "new
identifiable treatment facilities" are eligible for five-year
amortization. Such facilities generally include only
depreciable tangible property (not including a building and
its structural components, unless the building is exclusively
a treatment facility) that is constructed, reconstructed or
erected by the taxpayer after December 31, 1968, or acquired
after December 31, 1968, if the original use of the property
commences with the taxpayer and commences after such date.

Explanation of the Bill

The bill would provide an "agricultural environmental
credit" for property used in certain agriculture-related
activities to control environmental pollution and for soil
and water conservation expenditures. For any taxable year,
the agricultural credit would be equal to the lesser of (1)
the sum of (a) 15 percent of the basis of each "agricultural
environmental property" placed in service during that year
and (b) 15 percent of the amount allowed as a deduction under
Code section 175, or (2) the lesser of (a) $15,000 or (b) the
excess of $150,000 over the amount of credit previously
claimed by the taxpayer in prior taxable years.

To be eligible for the credit, a taxpayer would have to
be primarily engaged in a farming-related business, i.e., a
farming business (within the meaning of Code sec.
263A(e) (4)), a trade or business of mixing fertilizers from
purchased fertilizer materials, or a trade or business of the
wholesale distribution of animal feeds, fertilizers,
agricultural chemicals, pesticides, seeds or other farm
supplies (other than grains).

- 12 -



Effective Date

The bill would apply to rentals occurring after December 31,
1976.



4. S. 882 (Senator Kohl)

Rollover of Gain from the Sale of Farm Assets into an Asset
Rollover Account

Present Law

Under present law, gain from the sale of farm assets is
generally includible in income for the taxable year in which
the assets are sold.

1 {2} ft Bil

The bill would permit a qualified farmer to defer
recognition of a limited amount of net gain from the sale of
qualified farm assets to the extent the farmer contributes an
amount equal to such gain to one or more asset rollover
accounts ("ARAs") in the taxable year in which the sale
occurs. An ARA would be an individual retirement arrangement
("IRA") that is designated at the time of establishment as an
ARA. Except as provided under the bill, an ARA would be
treated in the same manner as an IRA. Thus, amounts
contributed to an ARA (and earnings on such amounts) would be
includible in income when withdrawn from the ARA. However,
unlike IRAs, no deduction would be allowed for contributions
to an ARA, and rollover contributions to an ARA could be made
only from other ARAs.

Contributions to one or more ARAs (and thus deferral of
qualified net farm gain) in any taxable year would be limited
to the lesser of (1) the qualified net farm gain for the
taxable year, or (2) an amount determined by multiplying the
number of years the taxpayer is a qualified farmer by $10,000
($20,000 for joint filers in each year the taxpayer’s spouse
also is qualified farmer). In addition, the aggregate amount
for all taxable years that could be contributed to all ARAs
established on behalf of an individual could not exceed
$500,000 ($250,000 in the case of separate return by a
married individual), reduced by the amount by which the
aggregate value of assets held by the individual and the
individual’s spouse in IRAs (other than ARAs) exceeds
$100,000. A taxpayer would be deemed to have made a
contribution to an ARA on the last day of the preceding
taxable year if the contribution is made on account of such
taxable year and is made not later than the time prescribed
by law for filing the individual’s Federal income tax return
for the year (not including extensions) .

Under the bill, qualified net farm gain would be defined
as the lesser of (1) the net capital gain of the taxpayer for
the taxable year, or (2) the net capital gain for the taxable
year determined by taking into account only gain (or loss) in

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3. S. 545 (Senators Boren, Baucus, Danforth, Daschle, Dole,
Durenberger, Grassley, Reigle, Roth, and Others)

Treatment of Gains and Losses from Certain Dispositions by
Farmers’ Cooperatives

Present Law
in_general

Unlike other corporations, a cooperative association is
allowed to exclude from its taxable income any patronage
dividends paid to its members or patrons or amounts paid in
redemption of a nonqualified written notice of allocation
(sec. 1382).4 Members of a cooperative association who
receive patronage dividends must treat the dividends as
income, reduction of basis, or some other treatment that is
appropriately related to the type of transaction that gave
rise to the dividend. For example, where the cooperative
association purchases equipment for its members, patronage
dividends attributable to equipment purchases are treated as
a reduction in the recipient’s basis in the purchased
equipment (provided the recipient still owns the equipment).

efi: on atrona divid

In general, a patronage dividend means an amount paid to
a patron (1) on the basis of the quantity or value of
business done with or for such patron, (2) under an
obligation of the cooperative association to pay such amount,
which obligation existed before the association received the
amount so paid, and (3) which is determined by reference to
the net earnings of the organization from business done with
or for its patrons. Such term does not include any amount
paid to a patron to the extent that such amount is out of
earnings other than from business done with or for patrons,
or such amount is out of earnings from business done with or
for other patrons to whom no amounts are paid, or to whom
smaller amounts are paid, with respect to substantially

* Additionally, cooperative associations may reduce their

gross income by the amount of qualified per-unit retain
certificates and the amounts paid for redemptions of nonqualified
per-unit retain certificates. A per-unit retain certificate is,
in general, a written notice that sets forth the "per-unit retain
allocation", that is, the allocation by the cooperative
association to a patron with respect to goods marketed by the
cooperative association for the patron, which is not determined
by reference to the net earnings of the organization.



2. §S. 531 (Senators Durenberger and Hatch)

Increase the Unified Estate and Gift Tax Credit

Present Law

The Federal Government imposes a transfer tax on the
cumulative property transfers made by gift or at death in excess
of an amount exempted by a unified credit. Since 1987, the
amount of the unified credit has been fixed at $192,800, which
effectively exempts a total of $600,000 in taxable transfers from
the estate and gift tax. The benefits of the unified credit are
phased out by a 5-percent surtax imposed upon taxable transfers
over $10 million and not exceeding $21,040,000.

The unified credit was originally enacted in the Tax Reform
Act of 1976. As enacted, the credit was phased in over five
years to a level (i.e., a unified credit of $47,000) that
effectively exempted $175,625 of taxable transfers from the
estate and gift tax in 1981. The Economic Recovery Tax Act of
1981 increased the amount of the unified credit each year between
1982 and 1987, from an effective exemption of $225,000 in 1982 to
an effective exemption of $600,000 in 1987. The unified credit
has not been increased since 1987.

Explanation of the Bill

The bill would increase the present-law unified credit to an
amount (i.e., $345,800) that would effectively exempt $1,000,000
in taxable transfers from the estate and gift tax.?

Effective Date

The bill would apply to the estates of decedents dying, and
gifts made, after the date of enactment.

3 A conforming amendment to the 5-percent surtax would be
necessary to permit the increased credit to phase out properly
under S. 531. S. 531, as presently drafted, does not contain
such a conforming amendment.



include gain or.ioss on the sale or other disposition of
certain assets in the determination of net earnings done with
or for patrons. For this purpose, a "farmer cooperative"
would be defined as any farmers’, fruit growers’, or like
organization or association to which part I of subchapter T
applies.

Ay ts which thi 11 lie

The bill would apply to any asset (including stock or
any other ownership or financial interest in another entity),
or portion thereof, that is used by the cooperative to
facilitate the conduct of business done with, or for, its
patrons (herein referred to as a “patronage asset"). Where
an asset is not used exclusively to facilitate the conduct of
business done with, or for, the farmer cooperative’s patrons,
the bill would apply only to the extent that the asset is
used to facilitate the conduct of business with, or for, its
patrons. Allocating the use of the asset between patronage
and non-patronage operations could be determined by any
reasonable method. The bill also would require that section
1231 be applied separately to patronage gains and losses and
nonpatronage gains and losses.

Rules applicable to election

An election made under the bill would apply to all sales
(or other dispositions) of patronage assets during the
taxable year for which the election is made and all
subsequent taxable years until revoked by the farmer
cooperative. Following a revocation of its election and
absent the consent of the Treasury Department, a farmer
cooperative would not be eligible to make an election under
this bill until the third taxable year following the taxable
year for which the revocation is effective. A revocation
would be effective upon the filing of notice with the
Treasury Department.

Effective Date

The bill would be effective for sales or other
dispositions of property occurring in taxable years beginning
after the date of enactment.



DESCRIPTION OF MISCELLANEOUS
FARM-RELATED TAX PROPOSALS
(S. 226, S. 531, S. 545, S. 882,
S. 1615, S. 1691, AND S. 1814)
Scheduled for a Hearing
Before the

SUBCOMMITTEE ON
ENERGY AND AGRICULTURAL TAXATION

of the
SENATE COMMITTEE ON FINANCE

on October 5, 1994

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION

October 3, 1994

JCX-23-94



5. S. 1615 (Senators Daschle, Durenberger,
Grassley, and Others)

Treatment of Livestock Sold on Account of
Weather-Related Conditions

Pre: Lay

In general, taxpayers using the cash method report
income in the year it is actually or constructively received.
However, present law contains two special rules applicable to
livestock sold on account of drought conditions. Code
section 451(e) provides that a cash method taxpayer whose
principal trade or business is farming and who is forced to
sell livestock due to drought conditions may elect to include
income from the sale of the livestock in the taxable year
following the taxable year of the sale. This elective
deferral of income is available only if the taxpayer
establishes that, under the taxpayer’s usual business
practices, the sale would not have occurred but for drought
conditions that resulted in the area being designated as
eligible for Federal assistance. This exception generally is
intended to put taxpayers who receive an unusually high
amount of income in one year because of a drought in the
position they would have been in absent the drought.

In addition, the sale of livestock (other than poultry)
that is held for draft, breeding, or dairy purposes in excess
of the number of livestock that would have been sold but for
drought conditions is treated as an involuntary conversion
under section 1033(e). Consequently, gain from the sale of
such livestock may be deferred by reinvesting the proceeds of
the sale in similar property within a two-year period.

Explanation of the Bill

The bill would amend Code section 451(e) to provide that
a cash method taxpayer whose principal trade or business is
farming and who is forced to sell livestock due not only to
drought (as under present law), but also to floods or other
weather-related conditions, may elect to include income from
the sale of the livestock in the taxable year following the
taxable year of the sale. This elective deferral of income
would be available only if the taxpayer establishes that,
under the taxpayer's usual business practices, the sale would
not have occurred but for the drought, flood or other
weather-related conditions that resulted in the area being
designated as eligible for Federal assistance.

In addition, the bill would amend Code section 1033 (e)
to provide that the sale of livestock (other than poultry)
that is held for draft, breeding, or dairy purposes in excess

- 10-



connection with a disposition of a qualified farm asset. A
qualified farm asset would be an asset used by a qualified
farmer in the active conduct of the trade or business of
farming. A qualified farmer would be a taxpayer who during
the 5-year period ending on the date of the disposition of a
qualified farm asset materially participated in the trade or
business of farming, and 50 percent or more of such trade or
business is owned by the taxpayer (or spouse) during the
5-year period.

Any individual who made a qualified contribution to, or
who received any amount from, an ARA for any taxable year
would have to include on the individual’s Federal income tax
return for such taxable year and any succeeding taxable year
{or on such other form as the Secretary may prescribe)
information similar to that required in the case of
designated nondeductible contributions to an IRA. Excess
contributions to an ARA would be subject to the penalties
applicable to excess contributions to an IRA.

ec e ef

The bill would apply to sales and exchanges occurring
after the date of enactment.



identical transactions.

Definition of income derived from sources other than
patronage

Treasury regulations provide that "...’income derived
from sources other than patronage’ means incidental income
derived from sources not directly related to the marketing,
purchasing, or service activities of the cooperative
association. For example, income derived from the lease of
premises, from investment in securities, or from the sale or
exchange of capital assets, constitutes income derived from
sources other than patronage" (Treas. Reg. sec.
1.1382-3(c)(2)). Notwithstanding the language of the
Treasury regulations, both the Internal Revenue Service and
the courts have held that, in some cases, income of the types
described in the Treasury regulations may constitute income
derived from patronage sources.*

Also, the Internal Revenue Service has ruled that any
gain treated as ordinary income under the depreciation
recapture rules of section 1245 is treated as patronage
source income in the same portion that the depreciation
deductions were taken (Rev. Rul. 74-84, 1974-1 C.B. 244).
The ruling further held that any additional gain that is
treated as capital gain is not patronage-sourced income.

Explanation of the Bill
In_ general

Under the bill, a "farmer cooperative" could elect to

5 See, e.g., Rev. Rul. 69-576, 1969-2 C.B. 166 (patronage
dividend from cooperative bank on loans used for patronage
business considered patronage source income because it
"...facilitates the accomplishment of the cooperative’s
marketing, purchasing, and service activities...."); Astoria
Plywood Corporation v. United States, 79-1 U.S.T.C. par. 9197 (D.
Ore. 1979) (payments for cancellation of a lease on a building
used by cooperative for patronage-sourced activities were
patronage source income); Land O’Lakes, Inc. v. United States,
675 F. 2d 988 (8th Cir. 1982) (dividends from stock in bank held
to be patronage source income where the acquisition of the bank’s
stock was necessary fo receive financing for patronage
activities); § Li Bank for iv Vv ted States,
624 F. 2d 1041 (Ct. cL. 1980) (interest earned on short-term
investment of temporary excess cash of a cooperative bank held to
be patronage source income) .



DESCRIPTION OF BILLS

1. S$. 226 (Senators Daschle, Baucus, Boren, Conrad, and Others)

Estate Tax Recapture from Cash Leases of
Specially Valued Property

Present Law

A Federal estate tax is imposed on the value of property
passing at death. Generally, the value of property is its fair
Market value, that is, the price at which the property would
change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts.

Under section 2032A of the Code, the executor may elect to
value certain "qualified real property" used in farming or
another qualifying trade or business at its current use value
rather than-its highest and best use. If, after the special use
valuation election is made, the heir who acquired the real
property ceases to use it in its qualified use within 10 years
(15 years for individuals dying before 1982) of the decedent’s
death, an additional estate tax is imposed in order to
"recapture" the benefit of the special use valuation (sec.
2032A(c)).

Some courts have held that the cash rental of specially
valued property after the death of the decedent is not a
qualified use and, therefore, results in the imposition of the
additional estate tax. Martin v. Commissioner, 783 F.2d 81 (7th
Cir. 1986) (cash lease to unrelated party); Williamson v.
Commissioner, 93 T.C. 242 (1989) (cash lease to family member) .

Explanation of the Bill

The bill would provide that the cash lease of specially
valued real property by a qualified heir to a "member of the
family"? (who continues to operate the farm or closely held
business) does not cause the qualified use of such property to
cease for purposes of imposing the additional estate tax under
Code section 2032A(c).

2 A member of the family, with respect to an individual,
includes an ancestor, spouse, lineal descendant, lineal
descendant of such individual’s spouse or parents, and any spouse
of any such lineal descendant (sec. 2032A(e) (2)).

-2-



"Agricultural environmental property" would be defined
as any new, identifiable treatment facility (as defined in
Code sec. 169(d) (4) (A), substituting December 31, 1993 for
December 31, 1968) used in a farming-related business for the
primary purpose of complying with Federal, State and local
environmental laws dealing with the abatement or control of
water, soil or atmospheric pollution or contamination by
removing, altering, disposing, storing or preventing the
creation or emission of pollutants, contaminants, wastes or
heat. “Agricultural environmental property" would not
include any expenditure that significantly increases the
output, extends the useful life, or reduces the operating
costs of the plant or property to which the facility relates
or alters the nature of any manufacturing or production
process or facility.

The credit could not be claimed on energy property
(defined in Code sec. 48(a)(3)) or other property to the
extent the basis of such property is attributable to
qualified rehabilitation expenditures (defined in Code sec.
47(c)(2)). ‘In addition, the amount that would be allowed as
a deduction for soil and water conservation expenditures
under Code section 175 would be reduced by the amount of the
credit. Finally, no credit would be available for property
to the extent an election is made under Code section 169
(amortization of pollution control facilities) with respect
to the basis of such property.

ff ve Date

The bill generally would be effective for property
placed in service after December 31, 1993, subject to
transition rules similar to the rules of section 48(m) (as in
effect prior to enactment of the Revenue Reconciliation Act
of 1990).



1993, so long as the taxpayer establishes that, under the
taxpayer’s usual business practice, income from such crops
would have been reported in 1993.

Eff. e Date

The bill would be effective for payments received after
December 31, 1992, as a result of destruction or damage
occurring after such date.

Prior Action

S. 1814 was approved by the Senate Committee on Finance
on March 24, 1994, with an amendment relating to the
indexation of the threshold applicable to the excise tax on
luxury automobiles (S.Rept. 103-244, April 5, 1994).



INTRODUCTION

The Subcommittee on Energy and Agricultural Taxation of the
Senate Committee on Finance has scheduled a public hearing on
October 5, 1994, to consider various farm-related tax proposals.
These proposals are: (1) S. 226 (estate tax recapture from
cash leases of specially valued property); (2) S. 531 (increase
the unified estate and gift tax credit); (3) S. 545 (treatment of
gains or losses from certain dispositions by farmers’
cooperatives); (4) S. 882 (rollover of gain from the sale of farm
assets into an asset rollover account); (5) S. 1615 (treatment of
livestock sold on account of weather-related conditions) ;

(6) S. 1619 (tax credit for environmental pollution control
property and for soil and water conservation expenditures); and
(7) S. 1814 (treatment of certain crop insurance proceeds and
disaster assistance payments) .

This document,! prepared by the staff of the Joint Committee
on Taxation, provides a description of present law and the bills
(in numerical order) that are the subject of the hearing.

' This document may be cited as follows: Joint Committee on

Taxation, Description of Miscellaneous Farm Related Tax Proposals
(JCX-23-94), October 3, 1994.



INTRODUCTION . . . 1 ee eee ee ee ee ee ee

DESCRIPTION OF BILLS .... 1. eee ee ee ee ee ee

1.

S. 226 (Senators Daschle, Baucus, Boren, Conrad,
and Others): Estate Tax Recapture from Cash Leases
of Specially Valued Property .....-.-....

S. 531 (Senators Durenberger and Hatch): Increase
the Unified Estate and Gift Tax Credit ......

S. 545 (Senators Boren, Baucus, Danforth, Daschle,
Dole, Durenberger, Grassley, Reigle, Roth, and
Others): Treatment of Gains or Losses from

Certain Dispositions by Farmers’ Cooperatives .. .

S. 882 (Senator Kohl): Rollover of Gain from
the Sale of Farm Assets into an Asset Rollover
Account . 2. 1 6 ee ee ee ee ee eee

S. 1615 (Senators Daschle, Durenberger,
Grassley, and Others): Treatment of Livestock
Sold on Account of Weather-Related Conditions .. .

S. 1691 (Senators Conrad, Daschle, Durenberger,
Grassley, and Others): Tax Credit for Environmental
Pollution Control Property and for Soil and Water
Conservation Expenditures ............-.

S. 1814 (Senators Daschle, Boren, Breaux, Conrad,
Dole, Durenberger, Grassley, and Others): Treatment
of Certain Crop Insurance Proceeds and Disaster
Assistance Payments ..........-4-+-+..48

10

12

14



of the number of livestock that would have been sold but for
drought (as under present law), flood or other weather-
related conditions is treated as an involuntary conversion.

Effective Date

The bill would apply to sales and exchanges after
December 31, 1992.

- 11 -



7. #%§S. 1814 (Senators Daschle, Boren, Breaux, Conrad, Dole,
Durenberger, Grassley, and Others)

Treatment of Certain Crop Insurance Proceeds and Disaster
Assistance Payments

Present Law

A taxpayer engaged in a farming business generally may
use the cash receipts and disbursements method of accounting
("cash method") to report taxable income. A cash method
taxpayer generally recognizes income in the taxable year in
which cash is received, regardless of when the economic
events that give rise to such income occur. Under a special
rule (Code sec. 451(d)), a cash method taxpayer may elect to
defer the income recognition of insurance proceeds received
as a result of destruction or damage to crops until the
taxable year following the year of the destruction or damage,
if the taxpayer establishes that, under the taxpayer’s usual
business practice, income from such crops would have been
reported in-a following taxable year. For this purpose,
certain payments received under the Agricultural Act of 1949,
as amended, or title II of the Disaster Assistance Act of
1988 are treated as insurance proceeds received as a result
of destruction or damage to crops.

Explanation of the Bill

The bill would amend the special rule of section 451(d)
to allow a cash method taxpayer to elect to treat certain
disaster-related payments as received in the year of the
disaster (even if the payments are received in the year
following the disaster) so long as the taxpayer establishes
that, under the taxpayer’s usual business practice, income
from the crops lost in the disaster would have been
recognized in that year. The bill would retain the present-
law election to defer the recognition of income in applicable
situations.

The bill also would expand the payments for which these
elections are available to include disaster assistance
received as a result of destruction or damage to crops caused
by drought, flood, or other natural disaster, or the
inability to plant crops because of such a disaster, under
any Federal law (rather than only payments received under the
Agricultural Act of 1949, as amended, or title II of the
Disaster Assistance Act of 1988).

Thus, for example, the bill would allow a calendar-year,
cash-method taxpayer who has received disaster assistance
payments in 1994 relating to the destruction of crops by a
flood in 1993 to elect to treat such payments as received in

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