[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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