Cash Rent, failure to pay self-employment tax ruled fatal to Iowa capital gain exclusion. Iowa has an unusual capital gain exemption on sales of farm and business property for taxpayers meeting both a 10-year holding-period requirement and a ten year “material participation” test. The Iowa Department of Revenue yesterday released three rulings holding that taxpayers failed to meet the second requirement on sales of farm ground. The material participation rules are for the most part the same as in the federal “passive loss” rules.
Cash rent. Document 14201019 holds that you don’t “materially participate” if all you do is rent farm ground:
The issue raised in the protest involves whether a capital gain deduction from the sale of farmland was properly disallowed on the Iowa individual income tax return for the 2009 tax year. The farmland, which was held in the name of two partnerships, West Side Acres and East Side Acres, was involved in a cash rent arrangement. There is no dispute that the farmland was held for more than ten years, but the Department contended that the ten year material participation test was not met.
The taxpayers claimed they spent more than 100 hours managing their farm rentals, but the Department said that activity didn’t count (my emphasis):
The Department notes that most of the hours spend by protester in the farming operation that was provided in the January 29, 2014 letter related to maintenance of business financial records, including review of property tax estimates and assessments and payment of expenses. The Stoos decision stated that actions of paying the mortgage, preparing taxes and other financial work is not materially related to the farming operation, and these hours were considered “investor-type” activities which were not part of the day-to-day operation of the farm. Therefore, those hours do not count toward material participation, and the 100 hour test has not been met by protester.
This is the result I would have predicted. Cash rent of farm land is not normally considered “farming” under the passive loss rules.
Conservation Reserve and Self-employment Tax. Documents 14201020 and 14201017 deny the capital gain exclusion to two taxpayers because they failed to pay self-employment tax on CRP payments. The liability of CRP recipients for self-employment tax is controversial; a pending Eighth Circuit case seems likely to hold that the tax doesn’t apply to CRP recipients who do not otherwise farm.
The rulings say that the Department goes by the treatment of the payments reported on the taxpayers returns: if they taxpayer paid SE tax on CRP payments, they are considered to have materially-participated in those years, but not otherwise. From Document 14201017 (my emphasis)
The Department first notes that the Federal Court of Appeals for the Sixth Circuit in Weubker v. Commissioner, 205 F.3d 897 (2000) held that CRP payments were net income from self-employment because they were received in exchange for performing tasks “that are intrinsic to the farming trade or business” such as tilling, seeding, fertilizing and weed control. Subsequently, the Internal Revenue Service issued Notice 2006-108 which states that CRP payments either to a farmer who either personally fulfills the CRP obligations or who isn’t an active farmer and fulfills this obligation through a third party are both includible in self-employment income and are not excludible as rentals from real estate.
Therefore, the Department contends that self-employment tax was clearly due on these CRP payments.
Since protester did not pay self-employment tax on this CRP income, the Department contends that the material participation test was not met. In addition, protester does not meet the retired farmer exception regarding material participation for 5 of the 8 years prior to retirement since self-employment tax was not paid on the CRP acres prior to you receiving social security benefits in 2003. Therefore, the Department contends that you do not meet the qualifications for the capital gain exclusion since you did not materially participate in the CRP activity for ten years.
The liability for SE tax on CRP payments was never as open-and-shut as the Department says. Some commentators have argued that Weubker is wrong, and that CRP, by itself, doesn’t constitute farming (see here and here). Even so, it is also a stretch to say that the minimal maintenance required on CRP ground rises to the level of “material participation.”
The Department here is saying in effect that they will take your word for it — as shown on your tax filings. If you paid SE tax on your CRP income, you’re a farmer as far as they are concerned, and you qualify for the exclusion. Given the stratospheric cost of farm ground nowadays, taxpayers may find it worth paying a little SE tax to qualify for the Iowa gain exclusion.
Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit.
They are talking about “FATCA,” the outrageous Congressional overreach into the operations of banks around the world.
Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.
In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act.
Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.
I wonder what the reaction in the U.S. would be if, say, Russia demanded the bank account information of every American it said was a “Russian person.” I don’t think it would be popular. Yet our Congress thinks it is entitled to demand that non-U.S. banks cough up whatever information it feels like asking for.
The response has been to make financial life difficult for Americans overseas, as dealing with U.S. persons becomes more of a hassle than their business is worth. It also restricts employment opportunities abroad for Americans by making their employment inconvenient.
Charlie Rangel was one of the main sponsors of FATCA. He would know a little about not paying taxes.
Paul Neiffer, Sale of Gifted Grain Can Be Tax Free:
When the donee sells this grain, it will be reported as a capital gain. If time after harvest of the grain and the time of sale is less than a year, it is short-term. If this time is greater than a year, then it is long-term.
If the donee is in a low-enough bracket, long-term capital gains are taxed at zero. But watch out for the “Kiddie Tax.”
Jason Dinesen, Proper Documentation of Business Expenses:
In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.
Absolutely. Jason has some tips for keeping track of them.
Andrew Lundeen, Alan Cole, The Inequality Debate Ignores How Incomes Change Over the Life Cycle (Tax Policy Blog): “Income data from the IRS and the Census Bureau have their uses, but measuring equality isn’t one of them.”
Joseph Thorndike, How ISIS Is Using Taxes to Build a Terrorist State (Tax Analysts Blog)
TaxProf, The IRS Scandal, Day 462
Career Corner. Study: Working in a Windowless Cube is Ruining Your Life (Adrienne Gonzalez, Going Concern)
Tags: TaxProf, Kay Bell, Iowa capital gain exclusion, Joseph Thorndike, TaxGrrrl, Paul Neiffer, Iowa capital gain deduction, ten-and-ten exclusion, ten-and-ten deduction, Jason Dinesen, Andrew Lundeen, Alan Cole, Career Corner, Adrienne Gonzalez