[Congressional Record Volume 143, Number 8 (Tuesday, January 28, 1997)]
[Senate]
[Pages S693-S694]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                FARMERS AND THE ALTERNATIVE MINIMUM TAX

  Mr. GRASSLEY. Mr. President, we have had a victory--at least a 
temporary victory, but a good victory--with the IRS. Fifty-seven of us 
introduced a bipartisan bill, Senator Dorgan leading for the Democrats, 
myself for Republicans. The bill was introduced to do for farmers what 
has been the law since 1981, that if deferred sales contracts were 
used, farmers were still taxed on the year that the money was received.
  The IRS made a ruling that for alternative minimum tax purposes that 
income would be taxed the year that the sale was made, not the year 
that the

[[Page S694]]

money was received. Well, obviously this, if it were to go forward, 
would create a tremendous hardship in the agricultural community 
because farmers would be taxed on two crops in 1 year, rather than the 
planning that normally goes on in cash accounting farming.
  Common sense and reasonableness have prevailed at the IRS. Last night 
at about 6:30 I received a telephone call from the IRS stating their 
decision to delay for 1 year the enactment of their latest rule so that 
farmers now will be able to do during the current tax filing system 
what they have been doing for the last 15 years, to just keep on 
accounting for their income for tax purposes the way that it has 
legally been done.
  Then just within the last hour Commissioner Richardson had delivered 
to me her letter in response to my letter of December and also the 
latest recommendations as far as the regulations are concerned 
implementing her decision.
  The fact of life is, Mr. President, that the Internal Revenue Service 
was aware of 57 Members of this Senate in a bipartisan spirit--and 
maybe her decision was because she is an appointment of the President 
and that it then reflects the new attitude at the White House of 
bipartisanship during this congressional session.
  Regardless of what brought this about, I am thankful that common 
sense and reasonableness have prevailed. I thank each of my 57 
colleagues who have been involved in this issue for their timeliness in 
helping us sponsor this legislation, getting it in. We will now move 
forward to change an erroneous IRS ruling that has been backed up by an 
erroneous district court case so that law reflects what Congress has 
intended since 1981 when deferred sales contracts were made legal and, 
second, when we passed the alternative minimum tax legislation in 1986.
  I ask unanimous consent that the documents I have referred to be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                       Department of the Treasury,


                                     Internal Revenue Service,

                                 Washington, DC, January 28, 1997.
     Hon. Charles E. Grassley,
     U.S. Senate,
     Washington DC.
       Dear Senator Grassley: In your December 31, 1996 letter, 
     you asked me how farmers could comply with the Internal 
     Revenue Service's position on the treatment of deferred 
     contract commodity sales for alternative minimum tax (AMT) 
     purposes on their 1996 federal income tax returns. You also 
     asked that the Service provide guidance about complying with 
     its position ``before the traditional farmer tax filing 
     deadline of March 1, 1997.''
       As you and I have discussed, the position of the Service is 
     that for AMT purposes income from deferred contract commodity 
     sales must be reported in the year of sale. However, some 
     taxpayers have been reporting income from such sales for AMT 
     purposes in the taxable year they received their payments--
     not the year of sale.
       Earlier today, the IRS issued a Notice, a copy of which is 
     enclosed, advising those who have not followed the Service's 
     position how they should report deferred contract commodity 
     sales for AMT purposes on their returns for 1996. Basically, 
     for 1996 tax returns, taxpayers should make no changes in how 
     they have been reporting sales--even if contrary to the 
     Service's position.
       The Notice also provides guidance about how to change the 
     method of reporting deferred contract commodity sales for AMT 
     purposes. Taxpayers who follow that guidance will receive 
     audit protection with regard to the AMT issue for all open 
     years unless they are currently under audit for this issue.
       The way deferred contract commodity sales are reported for 
     the AMT is a ``method of accounting'' for tax purposes. The 
     law provides that the method of accounting a taxpayer uses 
     for tax purposes, even if it is not the correct method, 
     cannot be changed without the prior consent of the 
     Commissioner.
       The Service will issue automatic consent procedures for 
     taxpayers to follow to change from the accounting method they 
     currently use. This change must be made on a taxpayer's 
     federal income tax return for the 1997 tax year. Thus, 
     taxpayers do not need to change how they report deferred 
     contract commodity sales until filing their 1997 returns.
       I hope this information is helpful to you. Please let me 
     know if you have any questions.
           Sincerely,
                                       Margaret Milner Richardson.

        Part III--Administrative, Procedural, and Miscellaneous

       Notice of intent to issue guidance allowing farmers to 
     expeditiously change their method of accounting for deferred 
     payment sales contracts in computing alternative minimum tax.


                              Notice 97-13

       Summary: The Internal Revenue Service intends to provide 
     approval for taxpayers engaged in the business of farming to 
     change their method of accounting for the income from certain 
     deferred payment sales contracts for purposes of computing 
     their alternative minimum tax (AMT). Farmers will be allowed 
     to change to a permissible method of accounting for this 
     income, effective for taxable years beginning after December 
     31, 1996, by attaching Form 3115 to their 1997 federal income 
     tax returns to be filed during 1998. Farmers who change their 
     method of accounting in accordance with this procedure will 
     then receive audit protection with respect to the use of an 
     impermissible method of accounting for all taxable years 
     prior to the change, in accordance with generally applicable 
     rules.
       Background: The Service has received numerous inquiries on 
     the proper treatment, for AMT purposes, of income from the 
     sale of products raised by farmers or other inventory 
     property sold in the ordinary course of the farming business 
     under deferred payment sales contracts. A deferred payment 
     sales contract is one where at least one payment is to be 
     received after the close of the taxable year in which the 
     product is sold.
       Section 56(a)(6) of the Code provides that, in computing 
     alternative minimum taxable income (AMTI), income from the 
     disposition of property such as farm products is determined 
     without regard to the installment method under Sec. 453. 
     Thus, a farmer using the cash method, who sells farm products 
     under a deferred payment sales contract and does not elect 
     out of the installment method of reporting, must include in 
     AMTI in the year of the sale both the cash received and the 
     fair market value (or the issue price) of the deferred 
     payment obligation. Otherwise, the farmer is using an 
     impermissible method of accounting. If the farmer elects not 
     to apply the installment method to the sale, and reports the 
     income in the year of the sale, there is no AMTI adjustment 
     with respect to the sale.
       Section 446(e) generally provides that a taxpayer that 
     changes its method of accounting must secure the 
     Commissioner's consent before computing income using the new 
     method. In general, taxpayers who wish to change their method 
     of accounting must file Form 3115, Application for Change in 
     Accounting Method, with the Commissioner within the first 180 
     days of the taxable year in which the taxpayer desires to 
     make the change, and must pay a user fee (ranging from $500 
     to $900). Treas. Reg. Sec. 1.446-1(e)(3)(i). In addition, 
     Sec. 1.446-1(e)(3)(ii) authorizes the Commissioner to 
     prescribe administrative procedures setting forth the 
     limitations, terms and conditions necessary to obtain consent 
     to change a method of accounting.
       Automatic change in method of accounting: The Service will 
     issue guidance that will allow farmers currently using an 
     impermissible method of accounting for income from the sale 
     of farm products under deferred payment sales contracts for 
     AMT purposes to automatically change to a permissible method 
     of accounting. Under the forthcoming guidance, farmers will 
     be allowed to request the method change by attaching Form 
     3115 to their timely filed 1997 federal income tax return 
     (due in 1998). No user fee will be required.
       The method change will be effective for taxable years 
     beginning after December 31, 1996. In addition, the method 
     change will result in audit protection for all prior taxable 
     years with respect to the impermissible method of accounting 
     (i.e., the examining agent will not propose that a farmer 
     change the impermissible method of accounting for any prior 
     taxable year) in accordance with generally applicable rules. 
     See Rev. Proc. 92-20, Section 10.12, 1992-1 C.B. 685. Farmers 
     currently using an impermissible method of accounting for 
     such sales should continue to use that method in computing 
     AMT for taxable years ending prior to January 1, 1997.
       The automatic method change procedure will not be available 
     to farmers who have received written notification from an 
     examining agent (e.g., by examination plan, information 
     document request, notification of proposed adjustments or 
     income tax examination changes) prior to January 28, 1997, 
     specifically citing as an issue under consideration the 
     farmer's method of accounting for income from sales of farm 
     products under deferred payment sales contracts for AMT 
     purposes. In addition, the guidance will not apply if the 
     farmer's method of accounting for such income for AMT 
     purposes is an issue under consideration by an appeals office 
     or a federal court.
       Drafting information: The principal author of this notice 
     is William A. Jackson of the Office of Assistant Chief 
     Counsel (Income Tax and Accounting). For further information 
     regarding this notice, contact Jonathan Strum at (202) 622-
     4960 (not a toll-free call).

  Mr. GRASSLEY. Mr. President, I ask unanimous consent for another 5 
minutes on another issue.
  The PRESIDING OFFICER (Mr. Burns). The Senator has that right.
  
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