November 2015

November 2015

Reporting CRP Rents for Non-Farmers – The Disclosure Issue

The recent non-acquiescence issued by the IRS in the decision of the U.S. Court of Appeals for the Eighth Circuit in Morehouse v. Comrr has raised a question among some as to whether Form 8275 should be filed with the tax return of a non-farmer if the Conservation Reserve Program (CRP) rents are not reported on Schedule F.  Filing Form 8275 avoids negligence penalties associated with the tax return (if the position is not frivolous).  The main issue behind such a concern is whether taking a position on a return that is contrary to an IRS non-acquiescence rises to the level of negligence or disregard as required by I.R.C. §6662 for penalties to apply. 

We have detailed the historic treatment of the self-employment tax treatment of government program payments more fully elsewhere, but a brief discussion is in order.  In Revenue Ruling 60-32, the IRS ruled that payments to non-farmers for land idled under the Soil Bank program were not subject to self-employment tax.  Similarly, in Rev. Rul. 65-149, the IRS ruled that grain storage fees paid under a CCC loan program were subject to self-employment tax only in the hands of an active farmer. Non-farmers (those not materially participating in a farming operation), the IRS determined, did not have a self-employment tax liability on the payments. 

Non-farmers, in the IRS view, did not owe self-employment tax on CRP rental income.  The Tax Court, in 1996, supported this view in Ray v. Comr.  However, in 2003, the Chief Counsel’s Office of IRS announced a complete change in the IRS position.  In Chief Counsel Advice 200325002, the Chief Counsel’s Office took the position that a taxpayer is engaged in the trade or business of participating in the CRP simply by signing the CRP contract, agreeing to fulfill the maintenance and other terms of the contract.  In 2006, the IRS gave notice of proposed rulemaking that it would be going through the formal procedure to issue a new Revenue Ruling that would obsolete the 1960 Revenue Ruling which held to the contrary. Continue reading here.

Syngenta Fires Back

Last week, Syngenta filed a third-party complaint in the massive multi-district litigation (MDL) pending in Kansas. In its complaint, Syngenta fiercely denies its liability to plaintiffs in the pending actions, calling the litigation an “unprecedented attempt by Producer and Non-Producer Plaintiffs to assert that it was somehow a tort for Syngenta to sell a genetically modified corn seed called Viptera in the United States even though Syngenta had already received all required approvals from three U.S. federal regulatory agencies.”

Syngenta asserts, however, that if it is found to have been at fault, it was the exporters, grain elevators, and transporters of the grain who are really to blame. It was these third-party defendants, Syngenta alleges, who actively “commingled” the Viptera and Duracade corn with the rest of the corn supply. As such, Syngenta argues that any monetary damages should be “altogether the responsibility of” third-party defendants Cargill and ADM (as well as two transport companies Express Grain Terminal LLC and Rail Transfer Inc.). Specifically, Syngenta states:

If there is any judgment imposing liability based on the presence of Viptera in the corn supply and the alleged consequent loss of the Chinese market, any liability is placed where it should be: on the grain elevators, transporters, and exporters who indiscriminately commingled corn and corn grain as they purchased, stored, transported, resold, and exported corn, including by intentionally delivering commingled corn including a mixture of Viptera and non-Viptera corn (and corn by-products) into export channels.

Syngenta’s third-party complaint brings Cargill and ADM back to the Kansas-based litigation. In May, the court had remanded to state court negligence lawsuits filed by Cargill and ADM against Syngenta. The lawsuits had been consolidated into the MDL, but the court found that there was no federal jurisdiction for the claims. The complaints were filed in state court, did not involve diversity jurisdiction, and did not include any federal causes of action. The court disagreed with Syngenta that the doctrine of the federal common law of foreign relations created federal court jurisdiction. Continue reading here.

Modifying an Irrevocable Trust - Decanting

A recent IRS Private Letter Ruling dealt with the need to change an error in the drafting of an irrevocable trust in order to repair tax issues with the trust.  While an irrevocable trust normally cannot be changed after it is executed, there may be situations where a change might be possible.  Also, some states, either by common law or statute, an irrevocable trust can be modified for a variety of reasons. 

Private Letter Ruling 201544005 (Jun. 19, 2015), involved an irrevocable trust that had a couple of flaws.  The settlors (a married couple) created the trust for their children and the couple were also named as trustees.  One problem was that the trust terms gave the settlors a retained power to change the beneficial interests of the trust.  That resulted in an incomplete gift of the transfer of the property to the trust.  In addition, the retained power meant that I.R.C. §2036 came into play and would cause inclusion of the property subject to the power in the settlors’ estates.  The couple intended that their transfers to the trust be completed gifts that would not be included in their gross estates, so they filed a state court petition for reformation to correct the drafting errors.  The drafting attorney submitted an affidavit that the couples’ intent was that their transfers of property to the trust be treated as completed gifts and that the trust was intended to optimize the couples’ applicable exclusion amount.  The couple also sought to resign as trustees.   The court allowed reformation of the trust.  That had the result of fixing the tax problems.  The IRS determined that the court reformation would be respected because the reformation carried out the settlors’ intent. To continue reading, click here.


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