When the U.S. Government announced its tobacco buyout plan last year, many questions were left unanswered as to how payments to quota holders would be handled in terms of taxation. A recent set of guidelines helps to answer some of those questions, according to Keith Kightlinger, University of Georgia Extension economist.
IRS Notice 2005-51, released in late June, specifically addresses "like-kind exchanges," says Kightlinger.
"This notice provides answers to many questions relating to the taxation of payment to tobacco quota holders under the Tobacco Termination Payment Program (TTPP)," he says.
The notice, he adds, addresses only payments to tobacco quota holders, and there is no discussion of payment to tobacco producers. Issues addressed by the notice include the following:
— Taxation of payments to tobacco quota holders in compensation for the elimination of the quota asset.
— Basis of tobacco quota.
— Reporting gain or loss from "Owner Payments."
— Reporting gain or loss on purchased tobacco quotas if any of the cost of the quota was previously deducted (through amortization, depreciation or depletion).
— Imputed interest rules, if installment payments are received, and the installment method of reporting is used.
— Exclusion of "Owner Payments" from eligible for farm income averaging.
— Like-kind exchanges involving "Owner Payments."
The notice, says Kightlinger, provides much needed information for quota holders interested in deferring the gain or loss from the elimination of their tobacco quota and payment under the TTPP.
"The notice reaffirms the IRS's previously stated position that tobacco quota is an interest in land. Since land is real property under the Tax Code, tobacco quota that was held for investment or for use in a trade or business is eligible for like-kind exchange with any other real property to be used in the same manner," he says.
Because there cannot be a direct exchange of assets, such as tobacco quota for other real property, quota holders interested in a like-kind exchange must observe the rules for deferred like-kind exchanges, says Kightlinger.
These rules permit a taxpayer to dispose of one property, and they give him or her a time period to identity and acquire another qualified property.
The rules require that:
1. Funds from the sale of the asset disposed of (tobacco quota) cannot be directly received by the owner. Instead, the proceeds of the sale must be placed in the hands of a qualified intermediary. The quota holder may specify that funds be paid to their qualified intermediary, rather than through themselves, through the use of an "Assignment Contract" at their local FSA office.
2. The taxpayer has 45 days from the date of disposition of the property owned (tobacco quota) to identify the replacement property. For the purposes of payments to tobacco quota holders under the TTPP, Notice 2005-51 states that the date of disposition of the tobacco quota will be the earlier of :
a. June 30, 2005, for flue-cured tobacco, and Sept. 30, 2005 for all other types of tobacco; or
b. The date on which an owner and USDA enter into a contract for Owner Payments with respect to the quota. Contracts for Owner Payments will be considered to be completed when they are approved by USDA. Immediately upon approval, Form CCC-960 will be sent to the quota holder.
3. The taxpayer has the lesser of 180 days from the date or disposition, or the due date of the tax for the tax year in which the property was disposed of, to complete acquisition of the replacement property.
As of June 22, 2005, USDA had not approved and completed any Owner Payment contracts, and it appeared unlikely that any would be completed before June 30, says Kightlinger.
Tobacco quota holders considering a like-kind exchange should check with their local FSA office to be certain they have until Aug. 14, 2005 (45 days) to identify replacement property, and until Dec. 27, 2005 (180 days) to complete the like-kind exchange.
Notice 2005-51 does not address any tax issues relating to TTPP payments to tobacco growers. The Internal Revenue Service will address the federal tax treatment of these payments in a future notice, says Kightlinger.
The text of Notice 2005-51 is available on the Internal Revenue
Additional information on income tax and financial planning issues relating to payments to be made under the Tobacco Termination Payment Program is available from many sources, including The University of Georgia Tobacco Home Page at www.georgiatobacco.com.
Information on the Fair and Equitable Tobacco Reform Act of 2004 and the Tobacco Termination Payment Program is available on the USDA Farm Service Agency Web site at www.usda.fsa.gov/tobacco.