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29 orgs call for Internal Revenue Code revisions

Organizations say IRS interpretation could impair ability to use cash accounting method

Twenty-nine agricultural associations and businesses are calling for the repeal of an IRS opinion they say “places a cloud over thousands of legitimate agricultural businesses and threatens the livelihoods of American farm and ranch families.”

The organizations, which include the American Farm Bureau Federation and several state Farm Bureau affiliates, CoBank, CliftonLarsonAllen, Farmers for Tax Fairness, the American Soybean Association, National Cattlemen’s Beef Association and National Corn Growers Association, wrote a letter to Sens. Charles Grassley, Ron Wyden and Reps. Richard Neal and Kevin Brady.

In the letter, the 29 organizations ask the lawmakers to protect the ability of farmers and ranchers to use the cash method of accounting.

“The IRS has placed into question whether American farmers and ranchers who own their businesses through S corporations, trusts, and certain limited liability companies will be able to continue to use the cash method of accounting or whether the IRS will penalize them and require them to pay back taxes for having relied on this method of accounting,” the letter reads. (Download the letter by hitting the download button below).

In February 2017, the IRS issued an Action on Decision letter in response to the IRS’ loss in the 5th Circuit Court of Appeals in Burnett Ranches, Ltd. vs. U.S.

In Burnett Ranches, the IRS argued that a multi-generational rancher who managed her ranch was not an “active” farmer because she had structured her ranch such that her interest in the ranch was held by an S Corporation that she owned. The IRS reasoned that the Internal Revenue Code section exempting active farmers only applies to individuals and, since the owner in Burnett Ranches held her interest through an intermediary S corporation, she could not avail herself of the active farming exceptions.

Under the Internal Revenue Code, a farm or ranch may be declared a “farming syndicate” and lose its ability to use the cash method of accounting if less than 65% of ownership is held by “active” farmers. Put another way, the Internal Revenue Code states that a farm or ranch may be declared a farming syndicate if more than 35% of the farm’s losses are allocable to “limited partners or limited entrepreneurs.”

The IRS argument “ignores the clear intent of Congress that active farmers should not be declared farming syndicates,” the letter reads. “This reasoning also ignores the fact that many agricultural operations are structured as S Corporations, trusts, and limited liability companies for a myriad of reasons, including liability protection and inheritance and succession planning. For the thousands of farms and ranches structured in this manner, the consequences of being declared a farming syndicate would be devastating.”

The district court and 5th Circuit Court of Appeals rejected the IRS interpretation of the farming syndicate provisions. However, the organizations fear the IRS may seek back taxes and penalties from farmers and ranchers.

The letter’s authors are asking the lawmakers to:

  • Request the IRS formally reverse the Action on Decision letter; and
  • Explore legislative options to revise farming syndicate provisions of the Internal Revenue Code.
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