Grassley Praises Key New Tax Guidance for Farmers

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, today praised the Internal Revenue Service’s issuance this week of key tax guidance for farmers. For months, Grassley has been listening to the agricultural community about inadequate guidance and working with the IRS to make sure farmers have the information they need to file their taxes.

“Our tax system is based on voluntary compliance,” Grassley said. “Taxpayers file theirtaxes and pay what they owe without much government meddling. In exchange for voluntarycompliance, the government owes taxpayers clear, written guidance on tax policies. Last year, Ilearned this guidance was lacking in several areas for farmers. I urged the IRS to fix this, and it’sgood to see a positive step in this direction.”

This week, the IRS issued guidance on how farmers should report their market gain whenusing commodity credit corporation certificates to facilitate repayment of commodity creditcorporation loans. This was among several issues Grassley raised in a letter to the TreasuryDepartment last May. Grassley raised his concerns after the IRS terminated several agricultural taxteaching programs traditionally coordinated with agricultural universities.

“The IRS has more work to do on issuing good guidance to farmers, but this is a good development,” Grassley said. “I’ll continue to do everything I can to improve communication between the IRS and everyone in the agricultural community.”

Following are the text of this week’s IRS press release and Grassley’s letter last May to the Treasury Department.

IRS Reminds Farmers How to Report Market Gain When Using Commodity Credit Corporation (CCC) Certificates to Facilitate Repayment of CCC Loans

IR-2004-38, March 18, 2004

WASHINGTON – Farmers who pledge part or all of their production to secure a CCC loan may notbe properly reporting market gain when they use CCC certificates in connection with paying off theirloans, the Internal Revenue Service said today.

Farmers who pledge part or all of their production to secure a CCC loan can make a special electionto treat the loan proceeds as income in the year received and obtain a basis in the commodity for theamount reported as income. A farmer can make the special election by reporting the CCC loanproceeds as income on line 7a of Schedule F for the year the loan is received and attaching astatement to the return showing the details of the CCC loan. Approval from the IRS is not neededto adopt this method, but once a CCC loan is reported as income in the year received, all CCC loans,in that year and in later years, must be reported in the same manner until a change in accountingmethod is properly filed with the IRS.

Under the CCC nonrecourse marketing assistance loan program, the repayment amount for a loansecured by the pledge of an eligible commodity is generally based on the lower of the loan rate orthe prevailing world market price for the commodity on the date of repayment. If the loan is repaidwhen the world price is lower, the difference between that lower repayment amount and the originalloan amount is market gain. A farmer can use CCC certificates to facilitate repayment of a CCCloan. If a farmer uses cash instead of certificates, the farmer will receive a Form CCC-1099-GInformation Return showing the market gain realized. However, if a farmer uses CCC certificatesto facilitate repayment of a CCC loan, the farmer will not receive any information return. Regardlessof whether a CCC-1099-G is received, the market gain is either reported as income or as anadjustment to the basis of the commodity, depending on whether the special election has been made.

If a farmer made the special election to treat CCC loans as income when received, the farmeraccounts for market gain by making an adjustment to basis. The farmer’s basis in the commodity willbe equal to the amount of loan proceeds previously reported as income minus the amount of anymarket gain. A farmer who made the special election should report market gain as an Agriculturalprogram payment on line 6a of Schedule F, but not as a taxable amount on line 6b. A farmer reportsmarket gain in the same way even if the farmer used CCC certificates to facilitate repayment of theloan and does not receive Form CCC-1099-G with respect to the transaction.

Note that if a farmer did not make the special election and the CCC loan was not included in incomeas noted above, the market gain is reported on line 6a and as a taxable amount on line 6b ofSchedule F. This is the case even if the farmer used CCC certificates to facilitate repayment of theloan and does not receive a Form CCC-1099-G.

Farmers who do not make the special election to treat CCC loans as income when received shouldreport market gain as income, and those farmers who do make the special election should accountfor market gain as an adjustment to basis, even though Forms CCC-1099-G may not be received.Farmers who have already filed their 2003 Form 1040 individual return and failed to report marketgain properly should file an Amended Form 1040 by April 15th to reflect the proper tax treatment.IRS Publication 225, “Farmer’s Tax Guide,” has more information on how farm income should bereported and the tax consequences of CCC transactions. Publication 225 and tax forms are availablethrough the IRS Web site at IRS.gov, or by calling 1-800-TAX-FORM (1-800-829-3676). Taxpayers can also contact the IRS toll-free at 1-800-829-1040 for more information.

May 9, 2003

Pamela F. Olson
Assistant Secretary of the Treasury
Office of Tax Policy. Room Number 1334
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Ms. Olson:

It has been brought to my attention that due to the long evolution of federal farm subsidies,it would be appropriate for your department to review all of the current reporting requirements anddetermine if there is adequate published compliance guidance currently available on all types offederal farm subsidies.

As you know, throughout my career and now as the Chairman of the Senate FinanceCommittee, I have always believed that the only way to have a tax system based upon voluntarycompliance by American taxpayers is to have fair and forthright educational tools available for thepublic and their advisors. This requires the Treasury and the Internal Revenue Service to review,update and reach out to those taxpayers with adequate written guidance.

Over the last few months it has been brought to my attention that the reorganization of theIRS has resulted in the termination of several agricultural tax teaching programs traditionallycoordinated with agricultural universities. I find it disturbing that as the complexity of agriculturaltax compliance increases, the IRS has discontinued the availability of any training programs in thishighly specialized area. It is a shame when you have taxpayers and their advisors striving to educatethemselves in the correct methods of reporting that the program would be cut off for reasons basedsolely on reorganization.

In addition, I have also been made aware of the fact that there also seems to beinconsistencies in the "Market Segment Specialization Program", Audit Technique Guide forFarming, in reference to the correct reporting of government farm program payments. As you know,the farming economy traditionally does not work on sufficient margins from year to year to affordthe luxury of realizing there are inconsistent reporting techniques upon audit several years after filinga tax return.

I believe that Rev. Rul. 87-103 needs to be reviewed and updated. In addition, I also thinkthere is uncertainty as to the filing and reporting requirements surrounding Form CCC 1099-G. Weshould be helping and not hindering the American taxpayers and their advisors who are strugglingto give sound advice and simply file the correct forms.

Please direct your staff to start the review and update of Rev. Rul. 87-103 along withappropriate reporting requirements by the correct government agencies, to give full updatedcompliance directions for all of the federal farm subsidy payments, including U.S. Department ofAgriculture's current commodity certificate program.

In closing, I remind you, we need to keep American farmers doing what they do best --feeding America, and not becoming bogged down by unclear guidance. Sound, prompt guidance bythe U.S. Treasury will avoid that result.

Sincerely,

Charles E. Grassley
Chairman

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