Des Moines Register
03-04-07
Conservation tax proposal riles farmers, Iowa experts
IRS wants 15.3% tax on CRP payments even if landowners don't look after farm
By JERRY PERKINS
REGISTER FARM EDITOR
Two Iowa tax law experts criticize the Internal Revenue Service for proposing
that self-employment taxes be levied on Conservation Reserve Program
payments received by landowners who don't take an active role in a farming
business.
The Conservation Reserve Program pays landowners to remove their farmland
from production and put it into soil-conserving uses like grass or trees for 10- or
15-year contracts.
Legal arguments in the case are eye-burners for those not familiar with the finer
points of tax law, but the issue boils down to this:
Should landowners who have farms enrolled in the CRP pay the 15.3 percent
self-employment tax on their government payments if they don't take an active
part in running the farm?
No, says two Iowa State University professors and experts on agricultural
law, Neil Harl and Roger McEowen.
"I think the IRS is trying to make law here," Harl said. "I don't think they are
following the law."
McEowen said the IRS proposal means that if a landowner is in a nursing home
and unable to make decisions about a farm that is rented out to another, he or
she will still have to pay self-employment taxes on CRP payments if his or her
name is on the contract.
He also warns that the program might actually hurt the program's conservation
benefits.
Landowners who let their CRP contract expire can cash rent the land to a tenant
and avoid paying self-employment tax on the rental income, McEowen said.
"That point alone should concern conservation groups," he said.
Marie Cashman, an IRS lawyer who helped write the proposed tax law change,
said the tax agency wanted to clarify U.S. tax rules that go back almost 50 years
to the old soil bank program.
"We have all these dribs and drabs out there and we wanted to clear that up,"
Cashman said.
U.S. Sen. Charles Grassley, R-Ia., said constituents filled his ear with comments
at town meetings during a recent trip home, he said last week.
"I agree with Harl and McEowen," said Grassley, who is the ranking Republican
on the Senate Finance Committee.
Legislation correcting the IRS is possible, Grassley said, but passage of such a
law might be a problem.
A measure reversing the IRS proposal would have to be "revenue neutral," he
said. That means Congress would have to find a way to cut government
spending by an amount equal to the tax cut.
"That's true if you see this as a tax cut, which would then need to be revenue
neutral," McEowen said. "I don't see it that way. I see any potential legislation
merely correcting an inaccurate IRS interpretation of tax law."
Harl said there is no way of knowing how much money is at stake, but it could be
a considerable amount.
Iowa landowners collect $200 million a year from the government for 1.9 million
acres of Iowa farmland enrolled in the CRP.
Nationally, yearly payments total $1.8 billion for the 36.7 million acres enrolled in
the CRP.
Harl said he believes that the IRS proposal to impose a 15.3 percent selfemployment tax on everyone who receives government payments for the
Conservation Reserve Program is inconsistent with laws already on the books
and at odds with court rulings on similar cases. The proposal also is inconsistent
with the Internal Revenue Service's own rules promulgated for the last 40 years.
"The IRS is misrepresenting those court decisions that say there must be
'material participation' in the farming operation," McEowen said.
Harl said he recommends that the IRS withdraw the proposal and go back to the
drawing board so it can write a new rule that will be consistent with its previous
rulings.
McEowen said he is enlisting the support of tax lawyers and certified public
accountants to oppose the IRS proposal.
Cashman of the IRS disagreed with Harl and McEowen that the proposal runs
counter to previous IRS regulations, court cases and tax laws.
Public comments can be made about the proposal through March 19.
"All comments will be considered and then a decision will be made," Cashman
said. There is no timetable for making a final decision after comments are
reviewed.
"It all depends on the workload," Cashman said.
The rule may or may not be finalized after comments are received, she said, or
Congress might step in and make a legislative change in the proposal.
"That certainly would take care of it," Cashman said.
Farm Editor Jerry Perkins can be reached at (515) 284-8456 or
jperkins@dmreg.com