[Congressional Record Volume 143, Number 41 (Wednesday, April 9, 1997)]
[Senate]
[Pages S2902-S2903]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Grams):
  S. 529. A bill to amend the Internal Revenue Code of 1986 to exclude 
certain farm rental income from net earnings from self-employment if 
the taxpayer enters into a lease agreement relating to such income; to 
the Committee on Finance.


                   the FARM INDEPENDENCE ACT OF 1997

  Mr. GRASSLEY. Mr. President, I rise to introduce a bill on the 
Internal Revenue Code. From time to time we need to change the Internal 
Revenue Code, particularly when it deals with agriculture. However, 
there may be some people listening who do not understand agriculture. 
They may see these efforts as doing something special for farmers. I 
want to clarify today that I am a person who comes from the school of 
thought that every penny of legal tax that is owed the Federal 
Government should be paid. But I think, also, we have a responsibility, 
as Representatives of the people, to make sure that we balance 
taxpayers' compliance with taxpayers' rights.
  The legislation I am introducing today is centered on a proposition 
that has been the law for approximately 40 years. It proscribes that 
most farm landlords, just like small business people and other 
commercial landlords, should not have to pay self-employment tax on 
cash rent income. For 40 years it has been that way for farm people and 
city people alike. But in 1995, there was an Arkansas Federal tax court 
case that said the IRS could take other expansive factors into 
consideration. As a result of that tax case, the IRS decided to issue a 
related technical advice memorandum. These are widely deemed to be IRS 
policy statements on the law. As a result, many farm landlords are now 
treated differently from commercial and other city landlords. 
Consequently, farmers and retired farmers now find themselves paying 
15.3 percent self-employment tax on cash rent.
  So, I say to the IRS, as I give an explanation for my legislation 
this morning: Don't try to game the system. The law remains what people 
have counted on for 40 years. Unless there is an act of Congress, you 
ought to respect history before you change the rules. Obviously, the 
test of time ought to prove the taxpayer was right and the IRS was 
wrong, particularly since there now is a difference between the farm 
sector and the city sector.
  The correct rationale is simple, the self employment tax applies to 
income from labor or employment. Income from cash rents represents the 
value of ownership or equity in land, not labor or employment. 
Therefore, the self employment tax should not ordinarily apply to 
income from cash rents.
  So, along with Senator Grams of Minnesota, I am introducing this bill 
so farmers and retired farmers are not going to be encroached upon by 
the IRS and the Tax Code as a result of this Arkansas Federal tax court 
case and the IRS technical advice memorandum. The IRS has thus, through 
this court case and broadened by its own pronouncement, introduced a 
new barrier to the family farmer. Our legislation would remove this new 
IRS barrier so that farm families and retired farmers can continue to 
operate.
  Specifically, our legislation would clarify that when the IRS is 
applying the self-employment tax to the cash rent farm leases, it 
should limit its inquisition to the lease agreement. This is not an 
expansion of the law for the taxpayers. Rather, it is a narrowing of an 
antitaxpayer expansion initiated by the Internal Revenue Service. The 
tax law does not ordinarily require cash rent landlords in cities to 
pay the self-employment tax. Indeed, cash rent farm landlords are the 
only ones occasionally required to pay the tax. This is due to a 40-
year-old exception that allowed the retired farmers of the late 1950's 
to become vested in the Social Security system.
  However, the law originally imposed the tax on farm landlords only 
when their lease agreements with their renters required the landlord to 
participate in the operation of the farm and in the farming of the 
land.
  Forty years later and we are here today, the IRS has expanded the 
application of the self-employment tax for farmland owners. Now the Tax 
Court has told the IRS that in one particular instance, the IRS could 
look beyond the lease agreement. On this very limited authority, the 
IRS has unilaterally expanded the one court case even further so it now 
approximates a national tax policy.
  Our legislation clarifies that the IRS should examine only the lease 
agreement. Thus, it would preserve the pre-1996 status quo. We want to 
preserve the historical self-employment tax treatment of farm rental 
agreements, equating them with landlords in small businesses and 
commercial properties within the cities. The 1957 tax law was designed 
to benefit retired farmers of that generation so that they would 
qualify for Social Security.
  So, obviously, those persons of the 1950's have all since passed from 
the scene. Their children and grandchildren are now the victims of this 
IRS expansion of their old rule. Congress does not intend that farm 
owners be treated differently from other real estate owners, other than 
as they have been historically. We need the clarity provided in our 
legislation in order to turn back an improper, unilateral, and targeted 
IRS expansion of old tax law. In other words, I see this legislation as 
removing this new IRS barrier to the family farm and the American 
dream.
  I ask unanimous consent that the text of our bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 529

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Farm Independence Act of 
     1997''.

[[Page S2903]]

     SEC. 2. LEASE AGREEMENT RELATING TO EXCLUSION OF CERTAIN FARM 
                   RENTAL INCOME FROM NET EARNINGS FROM SELF-
                   EMPLOYMENT.

       (a) Internal Revenue Code.--Section 1402(a)(1)(A) of the 
     Internal Revenue Code of 1986 (relating to net earnings from 
     self-employment) is amended by striking ``an arrangement'' 
     and inserting ``a lease agreement''.
       (b) Social Security Act.--Section 211(a)(1)(A) of the 
     Social Security Act is amended by striking ``an arrangement'' 
     and inserting ``a lease agreement''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.
                                                                    ____

  Mr. GRAMS. Mr. President, I rise this morning in strong support of 
the Farm Independence Act of 1997 which my good friend, Senator 
Grassley, and I introduce here today. This legislation is critical in 
protecting American farmers and ranchers from yet another IRS attack--
the third this year--on the family farm.
  I suspect when President Grover Cleveland remarked that, ``just when 
you thought you were making ends meet, someone moves the ends,'' the 
former President must have been thinking about the Internal Revenue 
Service.
  This time, the IRS has issued a decision in one of its technical 
advice memoranda that, if fully enforced, will result in a 15.3-percent 
tax increase for thousands of farmers. Let me repeat that. A recent IRS 
decision could result in a 15.3-percent tax increase for thousands of 
farmers.
  Essentially, if a producer incorporates--and many Minnesota 
producers, both small and large, do--and then rents his land to the 
farm corporation, the rental income the farmer receives is not only 
subject to income tax but to an additional 15.3-percent self-employment 
tax.
  The purpose of the Grassley-Grams Farm Independence Act of 1997 is 
simple and it is straightforward. Our bill would stop the IRS from 
imposing this 15.3-percent tax increase on our farmers and ranchers.
  Mr. President, last Congress, we passed the most sweeping reforms in 
agricultural policy in 60 years and gave farmers the freedom to farm. 
At that time, we also promised farmers regulatory relief, improved 
research and risk management, free and fair trade, and--perhaps most 
importantly--we promised farmers tax relief.
  Now, many of us in Congress have made tax relief a top priority. I do 
so, in part, because it is a top priority for Minnesota farmers, and 
toward this end, I am an original cosponsor of a bill to repeal the 
estate tax, and I strongly support legislation to cut capital gains 
taxes.
  But, unfortunately, we haven't made much progress in convincing the 
President and some in Congress that this is not fat-cat legislation but 
absolutely necessary for the survival and success of the family farm.
  But, even more frustrating than these obstacles to providing farmers 
with critical relief from the death tax and capital gains taxes are 
back-door attempts by the IRS to actually raise taxes on our farmers 
and ranchers.
  First, came the alternative minimum tax which attacked cash-based 
accounting. Second, came a decision that income from culled cows--cows 
that don't milk--is income that disqualifies low-income farmers from 
receiving the earned income tax credit. And, now, the IRS wants to 
exact a 15.3-percent tax increase on thousands of American farmers and 
ranchers.
  Mr. President, I am 100 percent committed to providing Minnesota 
farmers with tax relief they desperately need. I hope the President and 
others in Congress come around on this issue as well.
  But, at a bare minimum, the President should send a signal to the IRS 
that these back-door attempts to raise revenues on the backs of the 
Nation's farmers and ranchers is totally unacceptable.
  I am convinced that a second gold age of agriculture is within reach 
in the final days of this century and also the whole of the next if 
only we in Government help--rather than hinder--our farmers' and 
ranchers' efforts.
  So, Mr. President, I urge my colleagues to support the Farm 
Independence Act of 1997. I also commend the Senator from Iowa for his 
leadership on this issue.
                                 ______