[Congressional Record Volume 143, Number 69 (Thursday, May 22, 1997)]
[Senate]
[Pages S5010-S5011]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DASCHLE (for himself, Mr. Dorgan, Mr. Conrad and Mr. 
        Johnson):

  S. 792. A bill to amend the Internal Revenue Code of 1986 to provide 
that certain cash rentals of farmland will not cause recapture of 
special estate tax valuation; to the Committee on Finance.


         the Special Use Valuation for Family Farms Act of 1997

  Mr. DASCHLE. Mr. President, since 1988, I have studied the effects on 
family farmers of a provision in estate tax law known as section 2032A. 
While section 2032A may seem a minor provision to some, it is 
critically important to family run farms. A problem with respect to the 
Internal Revenue Service's interpretation of this provision has been 
festering for a number of years and threatens to force the sale of many 
family farms.
  Section 2032A, which bases the estate tax applicable to a family farm 
on its use as a farm, rather than on its market value, reflects the 
intent of Congress to help families keep their farms. A family that has 
worked hard to maintain a farm should not have to sell it to a third 
party solely to pay stiff estate taxes resulting from increases in the 
value of the land. Under section 2032A, inheriting family members are 
required to continue farming the property for at least 15 years in 
order to avoid having the IRS recapture the tax savings.
  At the time section 2032A was enacted, it was common practice for one 
or more family members to cash lease the farm from the other members of 
the family. This practice made sense in a situation in which some 
family members were more involved than others in the day-to-day farming 
of the land. Typically, the other family members would continue to be 
at risk with respect to the value of the farm and participate in 
decisions affecting the farm's operation. Cash leasing among family 
members remained a common practice after the enactment of section 
2032A. An inheriting child would continue to cash lease from his or her 
siblings, with no reason to suspect from the statute or otherwise that 
the cash leasing arrangement might jeopardize the farm's qualification 
for special use valuation.
  Based at least in part on some language that I am told was included 
in a Joint Committee on Taxation publication in early 1982, the 
Internal Revenue

[[Page S5011]]

Service has taken the position that cash leasing among family members 
will disqualify the farm for special use valuation. The matter has 
since been the subject of numerous audits and some litigation, though 
potentially hundreds of family farmers may yet be unaware of the change 
of events. Cases continue to arise under this provision.
  In 1988, Congress provided partial clarification of this issue for 
surviving spouses who cash lease to their children. Due to revenue 
concerns, however, no clarification was made of the situation where 
surviving children cash lease among themselves.
  My concern is that many families in which inheriting children or 
other family members have cash leased to each other may not even be 
aware of the IRS's position on this issue. At some time in the future, 
they are going to be audited and find themselves liable for enormous 
amounts in taxes, interest and penalties. For those who cash leased in 
the late 1970's, this could be devastating because the taxes they owe 
are based on the inflated land values that existed at that time.
  A case that arose in my State of South Dakota illustrates the 
unfairness and devastating impact of the IRS interpretation of section 
2032A. Janet Kretschmar, who lives with her husband, Craig, in 
Cresbard, SD, inherited her mother's farm along with her two sisters in 
1980. Because the property would continue to be farmed by the family 
members, estate taxes were paid on it pursuant to section 2032A, saving 
over $50,000 in estate tax.
  Janet and Craig continued to farm the land and have primary 
responsibility for its day-to-day operation. They set up a simple and 
straightforward arrangement with the other two sisters whereby Janet 
and Craig would lease the sisters' interests from them.
  Seven years later, the IRS told the Kretschmars that the cash lease 
arrangement had disqualified the property for special use valuation and 
that they owed $54,000 to the IRS. According to the IRS, this amount 
represented estate tax that was being recaptured as a result of the 
disqualification. This came as an enormous surprise to the Kretschmars, 
as they had never been notified of the change in interpretation of the 
law and had no reason to believe that their arrangement would no longer 
be held valid by the IRS for purposes of qualifying for special use 
valuation. The fact is that, if they had known this, they would have 
organized their affairs in one of several other acceptable, though more 
complicated, ways.
  For many years, I have sought inclusion in tax legislation of a 
provision that would clarify that cash leasing among family members 
will not disqualify the property for special use valuation. In 1992, 
such a provision was successfully included in H.R. 11, the Revenue Act 
of 1992 and passed by Congress. Unfortunately, H.R. 11 was subsequently 
vetoed. In 1995, I introduced this provision as freestanding 
legislation; however, it did not reach the full Senate for a vote.
  Today, I am reintroducing a bill that is identical to the section 
2032A measure which was passed in the Revenue Act of 1992. I am joined 
in this effort by Senators Dorgan, Conrad and Mr. Johnson whose 
expertise on tax and rural issues are well known.
  I must emphasize that there may be many other cases in other 
agricultural States where families are cash leasing the family farm 
among each other, unaware that the IRS could come knocking at their 
door at any minute. I urge my colleagues in the Senate who may have 
such cases in their State to work with us and support this important 
clarification of the law.
  I intend to request that the Joint Committee on Taxation estimate the 
revenue impact of this proposal. At an appropriate time thereafter, I 
will recommend any necessary offsets over a 10-year period as required 
by the Budget Act.
  Mr. President, I ask unanimous consent that the full text of the bill 
be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 792

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

     SECTION 1. CERTAIN CASH RENTALS OF FARMLAND NOT TO CAUSE 
                   RECAPTURE OF SPECIAL ESTATE TAX VALUATION.

       (a) In General.--Subsection (c) of section 2032A of the 
     Internal Revenue Code of 1986 (relating to tax treatment of 
     dispositions and failures to use for qualified use) is 
     amended by adding at the end the following new paragraph:
       ``(8) Certain cash rental not to cause recapture.--For 
     purposes of this subsection, a qualified heir shall not be 
     treated as failing to use property in a qualified use solely 
     because such heir rents such property on a net cash basis to 
     a member of the decedent's family, but only if, during the 
     period of the lease, such member of the decedent's family 
     uses such property in a qualified use.''
       (b) Conforming Amendment.--Section 2032A (b)(5)(A) is 
     amended by striking the last sentence.
       (c) Effective Date.--The amendment made by subsection (a) 
     shall apply with respect to rentals occurring after December 
     31, 1976.
                                 ______