November 2013 – Significant Developments

November 1, 2013 | Roger McEowen

Farm Bill.  With the number of days that the Congress will be in session the remainder of the year dwindling away, it is looking more likely that there won’t be a new Farm Bill.  The Senate passed its bill last June (S. 954) and the House passed their bill in September (H.R. 2642).  The two versions differ vastly and it just doesn’t look likely that a compromise can be reached by the end of the month.  Differences remain on crop insurance, the replacement mechanism for direct payments and various other provisions.  Also, a major sticking point is the Food Stamp program.  Historically, Food Stamps have been included in the Farm Bill for purely political reasons – to get non-farm legislative support for its passage.  But, in reality, the only true way to reform farm programs is to pull Food Stamps out of the Farm Bill and deal with it in separate legislation or make reauthorization of the Food Stamp program (if included in the Farm Bill) come up for reauthorization at a time different than that for the actual farm-related provisions.  Food Stamp spending has skyrocketed in recent years, with the 2012 amount doubling the 2008 amount.  Neither the Senate nor House versions of the Farm Bill make any meaningful attempt to rein in Food Stamp spending.  The House bill proposes a five percent reduction (according to the Congressional Budget Office (CBO), and the Senate bill a mere one-half of one percent (according to the CBO).  

Presently, recipients of Food Stamps don’t have to be working or looking for work.  The House version of the Farm Bill does contain a provision that attempts to tie work requirements to receipt of Food Stamps, but the Senate version does not.  Likewise, “broad-based categorical eligibility” allows Food Stamp recipients to avoid otherwise applicable asset eligibility tests.  The House bill tries to bar such eligibility, but the Senate bill does not.    

As noted above, another sticking point is crop insurance.  Crop insurance spending has also ballooned in recent years (according to the Government Accounting Office) from an average annual cost of 3.1 billion (2000-2006) to a projected $8.9 billion annually from 2013-2022 under present law.  Neither the House nor Senate versions of the Farm Bill really do anything to deal with the increased subsidies that assist farmers in paying crop insurance premiums.

NIIT Final Regulations.  In late November, the Treasury Dept. issued final regulations (and some proposed regulations) with respect to the Net Investment Income Tax (NIIT).  The final regulations differ in material respects from the proposed regulations, and in many respects are friendlier to taxpayers.  Under the final regulations, self-rentals are not passive, the grouping rules are explained and guidance is given when changes on an amended return would impact the grouping election or require a regrouping.  Also, a special rule is included concerning self-charged interest.  The rule is mostly favorable, but there is a unique twist to the rules when self-employment tax is involved.  For a summary review of the final rules (and the new proposed rules as applied to partnerships and S corporations) see our tax school handout on the rules prepared by Paul Neiffer, click here to view

The rules will be covered at the remaining tax schools, and were covered at the Kansas schools earlier this month. 

The Parsonage Exclusion.   On November 22, a federal judge in Wisconsin ruled that the cash allowance provision of I.R.C. §107(2) was unconstitutional.  That’s the provision that allows a minister of the gospel to exclude from income the amount a church provides for housing costs for a home that the minister owns.  The court viewed that provision as providing a benefit to ministers that other taxpayers do not have available and is not necessary to alleviate a burden on religion.  However, the exclusion is still available for an allowance provided to a minister who lives in a parsonage that is owned by the church.  The Treasury Department is the defendant in the case, so the Obama Administration will have to decide whether to appeal the case.  The judge said that an injunction will be entered in the case on the later of 30 days after the decision (Dec. 22, 2013) or upon the finality of appeals.  The case is Freedom From Religion Foundation, Inc., et al. v. Lew, et al., No. 11-cv-626-bbc, 2013 U.S. Dist. LEXIS 166076 (W.D. Wisc. Nov. 22, 2013) and appears on our annotation list

LLC Valuation Issues in the Tax Court.  The U.S. Tax Court recently issued an opinion in a case involving a family-owned LLC that involved valuation issues.  The LLC’s operating agreement said that if an LLC interest was transferred outside the family, the new owner was a mere assignee that couldn’t participate in management unless all of the other owners agreed to allow such participation.  When the decedent died, the LLC interest involved in the case was owned in trust as a full member interest.  It was included in the decedent’s gross estate under I.R.C. §2038, but the estate valued it at less than fair market value as an assignee interest.  The Tax Court disagreed with the estate’s valuation, and said it should be valued as a full member interest.  But, the Tax Court also said that a willing buyer would take into account the transfer restrictions in the LLC’s operating agreement in determining the price to offer for the interest.  The estate also wanted to value the interest based on the income approach (historical distributions), but the IRS valued the interest in accordance with the net asset approach (fmv – liabilities multiplied by the percentage of the LLC attributable to the LLC interest).  The court largely used the IRS approach, but appears to have not eliminated a mixed valuation approach if supported by the facts.  The case is also instructive to estates that try to argue a lower valuation that what was reported on Form 706.  That tactic rarely works.  The case is Tanenblatt v. Comr., T.C. Memo. 2013-263, and is referenced in our annotation list.