[Congressional Record Volume 143, Number 68 (Wednesday, May 21, 1997)]
[Senate]
[Pages S4889-S4890]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. JEFFORDS (for himself, Mr. Kohl, Mr. Grams, Mr. D'Amato, 
        Ms. Collins, Mr. Daschle, Mr. Leahy, Mr. Smith of New 
        Hampshire, Mr. Grassley and Ms. Snowe):

  S. 775. A bill to amend the Internal Revenue Code of 1986 to exclude 
gain or loss from the sale of livestock from the computation of capital 
gain net income for purposes of the earned-income credit; to the 
Committee on Finance.


             The Earned-Income Credit Fairness Act of 1997

  Mr. JEFFORDS. Mr. President, I am today introducing a bill along with 
Senator Kohl and several of my colleagues which will amend the earned-
income credit to restore fairness to low-income dairy farmers across 
the country.
  Last year during the debate over welfare reform, Congress tightened 
up on the requirements for eligibility for the EIC. The law was amended 
to prevent taxpayers with investment assets from claiming the EIC, our 
rationale being that taxpayers with substantial investment assets 
should sell those assets rather than rely on the EIC to supplement 
their income. Specifically, the law now reads that if you have over 
$2,200 in disqualified income, you cannot claim the EIC.
  The earned-income credit (EIC) is a credit against tax available to 
low-income working taxpayers. The credit is refundable; in other words, 
even if you don't owe any income tax, the Government may still give you 
a refund. In this way, the credit is a kind of income assistance to 
low-income taxpayers, encouraging them to keep working.
  Mr. President, the problem lies in that the IRS has interpreted the 
term disqualified income to include gains realized by dairy farmers 
when they cull and sell cows no longer suitable for dairy farming. I 
disagree with the IRS' interpretation, as do many of my colleagues. In 
my view, culled dairy cows are not investment assets. When farmers cull 
and sell cows no longer fit for dairy farming, they're not cashing in 
on their investments. To the contrary, they're cutting their losses. 
And we should not automatically expect proceeds from these sales to be 
available to support the farmer's day-to-day living expenses. Farmers 
may not be able to use this money to put food on his or her family's 
table or clothing on his family's back. He or she may have to pump 
these funds back into the dairy operation. If the farmer intends to 
maintain a viable dairy farm, he or she may use proceeds from the sale 
of a culled cow to acquire another cow suitable for dairy farming. So, 
I think it is wrong that these sale proceeds should make the low-income 
dairy farmer ineligible for the EIC.
  The IRS' interpretation will result in the loss of income from 
thousands of struggling dairy farmers across the country. Dairy farmers 
have experienced a 25-percent decline in milk prices in recent months 
and for years have been faced with unstable and low milk prices. Based 
on the Farm Credit's analysis, the current IRS position would cost 
Vermont dairy farmers nearly $1 million in refunds and/or increased tax 
bills. Dairy farmers across the country will be adversely impacted by 
the current position of the IRS. The greatest impact will be in States 
that have a high number of small- and mid-sized family dairy 
operations. Losses to the Nation's dairy farmers have been estimated to 
be as much as $76 million.
  In short, in my view, when the income generated by a farmer's dairy 
operations is otherwise modest, he or she should not become ineligible 
for the EIC when he or she has the misfortune to discover that some of 
his or her dairy cows are nonproductive and disposes of those 
nonproductive assets at a profit.
  Because I disagree with the IRS interpretation, I, together with 16 
colleagues, wrote to IRS Commissioner Margaret Richardson on March 13, 
1997, to challenge the IRS interpretation of the EIC. Unfortunately, 
the IRS has maintained that its interpretation is correct. Accordingly, 
today I am introducing this bill, along with several of my colleagues, 
to overturn what we believe is an unwise and unwarranted interpretation 
by the IRS. I urge my colleagues to join us in this effort.
  Mr. President, I ask unanimous consent that additional material be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                  U.S. Senate,

                                   Washington, DC, March 13, 1997.
     Hon. Margaret Milner Richardson,
     Commissioner, Internal Revenue Service, Washington, DC.
       Dear Commissioner Richardson: We are writing because some 
     of our constituent dairy farmers have brought to our 
     attention their concern about a potentially adverse impact to 
     them that may result from an IRS interpretation of the earned 
     income credit (26 U.S.C. Sec. 32). Our constituents have 
     informed us that in conversations with taxpayers, IRS 
     personnel have indicated that a low-income dairy farmer may 
     become ineligible to claim the EIC if he decides to cull from 
     his herd a cow no longer suitable for dairy farming, and 
     subsequently sells the cow, realizing a gain of $2,200 or 
     more.
       We believe that this interpretation is incorrect. Section 
     32 of the Internal Revenue Code allows low-income taxpayers a 
     refundable credit against tax. Under Sec. 32(i)(1), this 
     earned income credit (EIC) is not available to taxpayers with 
     more than $2,200 in disqualified income. ``Disqualified 
     income'' is defined to include ``capital gain net income'' 
     for the taxable year.
       According to our constituents, the IRS has characterized 
     gains from the sale of culled cows as ``capital gain net 
     income.'' For the definition of ``capital gain net income,'' 
     Sec. 32(i)(1)(D) specifically references the definition of 
     that term in Sec. 1222. Section 1222(9) defines ``capital 
     gain net income'' as the excess of gains from sales of 
     ``capital assets'' over such losses from such sales.
       We do not believe that culled cows are ``capital assets.'' 
     As defined in Sec. 1221(2), the term ``capital asset'' does 
     not include ``property used in the trade or business.'' 
     Section 1231(b) defines the term ``property used in the trade 
     or business,'' and subsection (b)(3) specifically defines 
     cattle held by a taxpayer for 24 months or more for dairy 
     purposes as ``property used in the trade or business.'' It 
     would follow, then, that any gains resulting from the sale of 
     such cattle are not gains from sales of capital assets giving 
     rise to ``capital gain net income.'' Accordingly, we do not 
     believe that Sec. 32(i)(1)(D) disqualifies a dairy farmer 
     from claiming the EIC because of gains realized from sales of 
     culled cows.
       We request that the IRS review and summarize the 
     applicability of Sec. 32(i)(1)(D) to low-income dairy farmers 
     who realize gains of $2,200 or more upon the sale of culled 
     cows that they have held for more than two years. We also 
     request that you summarize what tax treatment would result if 
     the culled cows had not been held for two years. We look 
     forward to your response.
           Sincerely,
         Jim Jeffords, Alfonse D'Amato, Jeff Sessions, Bob Smith, 
           Patrick Leahy, Chris Dodd, Susan M. Collins, Jack Reed, 
           Joe Biden, Mike DeWine, Chuck Grassley, Rick Santorum, 
           Herb Kohl, Rob Grams, Olympia Snowe, Russ Feingold, 
           Judd Gregg.

  Mr. KOHL. Mr. President, I rise today as a co-author of this 
important legislation, which Senator Jeffords and I, and many others, 
introduce today on behalf of all of our nation's farmers.
  Let me begin by thanking my colleague from Vermont for his help and 
leadership on this issue. The economic health of our agricultural 
economy is paramount to both of our regions, and to the country at 
large. And tax provisions related to agriculture, whether it be the 
earned income credit [EIC] or other provisions, have repercussions 
throughout our agricultural economy.

[[Page S4890]]

 In the two regions that Senator Jeffords and I represent, dairy 
farming is of particular importance. And it is with our dairy farmers 
in mind that we feel an urgency in introducing this legislation. 
Because while the tax policy change that we are seeking to undo affects 
many livestock producers, it is the dairy farmers who are the hardest 
hit.
  Mr. President, our legislation will clarify that the sale of 
livestock should not be treated as capital gain net income for purposes 
of the EIC. As you may know, in last year's welfare bill, we took steps 
to tighten eligibility to the EIC, a refundable tax credit available 
only to lower income, working Americans. We did so to ensure further 
that, in a time of limited Federal resources, the EIC was benefiting 
those that it was intended to benefit--the working poor--those who have 
jobs but who often need extra help to avoid turning to public 
assistance. For many facing tough financial times and struggling to 
support their families, the EIC has been the difference between hard 
work and a hand out, between self-worth and self-doubt. And for many 
dairy farmers in Wisconsin, the EIC has helped pay seed bills and farm 
operating expenses and put food on kitchen tables.
  One of several EIC provisions approved by Congress last year expanded 
the category of disqualified income to include capital gain net income. 
As such, under current law, if a taxpayer reports more than $2,200 in 
capital gain net income, he or she is automatically disqualified from 
collecting the EIC.
  On its face, this tax policy adjustment seems reasonable. Most 
policymakers would agree that an individual who realizes substantial 
capital gain income from the sale of capital assets in any given year 
should not be eligible for a tax credit for the working poor. The House 
Committee report confirms as much.

  That said, however, we are here today because a subsequent IRS 
interpretation of that adjustment has restricted EIC eligibility in 
such a way that we believe goes far beyond congressional intent--
distorting the purpose of last year's reforms and denying the credit to 
a population of hard working Americans that the EIC was designed to 
help--small- and mid-sized family farmers.
  Specifically, the Internal Revenue Service [IRS] has interpreted 
capital gain income to include income generated by the sale of culled 
cows for purposes of the EIC. Further, the IRS argues that dairy cows 
represent the type of assets Congress would expect a taxpayer to sell 
to cover living expenses in lieu of claiming the credit.
  Mr. President, though I do not question their good intentions, I 
believe the IRS is misguided.
  As you may know, farmers sell cows no longer suited for dairy farming 
as a matter of course. It is a standard part of a farmer's business. 
And in times of low prices or economic stress, it can play an even more 
important role when some farmers are driven to cull cows more quickly 
than they otherwise would. In addition, the Tax Code defines dairy 
cattle held by a taxpayer for a certain period of time as property used 
in a trade or business, specifying that such property is excluded from 
the definition of capital assets. Since dairy cattle are not capital 
assets, it follows that sales of cattle should not give rise to capital 
gain income for EIC purposes.
  For our Nation's dairy farmers, this unfair policy change has come at 
a particularly cruel time, when milk prices have declined 
precipitously, and many have been forced to cull cows to make ends 
meet. Yet instead of stretching the family budget, they learn that 
their actions have actually resulted in thousands of dollars in extra 
taxes, leaving them worse off than before.
  The consequences for my home State have been devastating. In a sample 
of cases from a seven-county area in the eastern part of the State, the 
average loss of Federal and State EIC benefits to farmers has been 
$2,111 per family. And these are families with between one and seven 
children. The total loss to the approximately 12,000 Wisconsin dairy 
farms eligible for the EIC is estimated at $15.5 million.
  Denying the EIC to family farmers on the basis of culled cows sales 
is wrong. It is wrong, unfair, and Congress should act swiftly to 
correct it.
  I urge my colleagues to support this bipartisan legislation of 
national significance and help ensure the EIC continues to benefit 
those for whom Congress intended.
  Mr. GRAMS. Mr. President, I am proud to be a leading co-sponsor of 
legislation introduced today with my friend and colleague, Senator Jim 
Jeffords of Vermont. The Earned Income Credit (EIC) Fairness Act of 
1997 is a direct response to back-door efforts by the Internal Revenue 
Service to raise revenue on the backs of family farmers. This 
legislation simply clarifies the intent of Congress by preserving this 
important tax credit for our Nation's dairy farmers.
  I want to thank Senator Jeffords for his leadership on this issue. My 
colleague from Vermont and I have differed from time to time on what is 
best for the Nation's dairy industry in the way of federal dairy 
policy. However, I have always had a profound respect for his hard work 
and genuine commitment to Vermont's dairy farmers. They have in Senator 
Jeffords a tireless advocate in the U.S. Senate.
  I also want to commend Mike Foley, a teacher and dairy farmer from 
Melrose, MN for bringing this issue to my attention. Like other 
problems created by IRS misinterpretations of Congressional intent--
including the alternative minimum tax [AMT] and the self-employment tax 
problems--few knew of the EIC problem and the hardship it would 
ultimately cause. Thanks to Mike, we now have the opportunity to 
restore the IRS to its proper role of carrying out current laws instead 
of creating new ones.
  Mr. President, unless Congress acts on this legislation, the Nation's 
dairy farmers will be forced to pay $76 million in taxes they were 
never intended to pay. In effect, this is an agency-created $76 million 
tax hike on hard working, generally low-income, dairy producers. For 
dairy farmers in Minnesota, the tax hike would amount to about $6 
million. As a boy who grew up on a dairy farm, I know all too well how 
hard dairy farmers must work to make ends meet. Long hours. Early 
mornings. Late nights. The vacations--even for a day--which a lot of us 
take for granted are unthinkable for most of our dairy producers. This 
is especially true for the dairy producers who would be hit hardest by 
the new IRS-imposed tax hike. This is wrong. Wrong because the IRS has 
no business raising taxes by agency fiat. And, wrong because of the 
severe hardship the tax hike would impose on our Nation's dairy 
producers.
  During consideration of the 1996 Farm Bill, we promised our farmers 
long overdue tax relief, regulatory relief, improved risk management 
and research, and free and fair trade. My request of the 
administration, particularly the IRS, is simple. If you don't want to 
help keep this promise to America's farmers, simply step aside and at 
least don't hinder those of us who do.
  I urge my colleagues to give the EIC Fairness Act of 1997 speedy 
consideration and passage.
                                 ______